Time that, in fact, was going on in january and february, and then the plunge and the ricochet. Lets look at a few slides to try to prove it, so to speak the precondition of excess you see these bullet points here basically s p 500 before this selloff this week at an alltime high the price to sales, a fundamental on measuring the valuation, at an alltime high we know the s p is up 42 on a 5month basis and th nasdaq up 57 . The precondition of excess the next slide, divergence as the market is making alltime highs you see here, of course, that only 16 of the s p squint constituents were making all time highs the average stock in the s p is 28 below its alltime high. Thats not now thats on monday before we sold off. And then finally, basically, you see the number there, 46 , half, after all stocks in the s p 500 have no gains for two years. This is the precondition of divergence and the precondition of excess. The next slide, take a look. We have a very rare circumstance where the nasdaq 100 drops 10 in a twoday period. Its only happened 17 times in the history of the index, going back to 1984 so a very low probability. And yet, finally consider this what about of those 17 times where the nasdaq was up as much as 50 in the preceding five months before dropping like this, 10 in a twoday period. Thats only happened one other time before. It was april 14th of the year 2000, near the dotcom peak a few charts this is the channel that the qqq has been living in you can see there its welldefined ascending up into the right sort of affair now, take a look at the same chart pulled back for one year putting in perspective the move qqq and just now breaking below that up trend. Final chart. If and as we were to simply check back to the january peak, which is exactly what the s p has already done, you have another 11, 12 to go for the qqq. Wow the thought, were not done yeah. A lot of people are making the point that there is tremendous call activity here. It seems like there might have been clues in the options pits. Unfortunately, what we saw this week i think is the new normal, where we have longer and longer periods of suppressed volatility followed by this mass massive violent explosion in volatility this is in my opinion the positioning were seeing in the short dated options that have seen an explosion in volatility over the past couple of months if you look back the past 15 years, the 20day put call ratio has never been below. 7. Meaning calls have never outpaced puts a significant amount for a long period of time but for the year 2020, 34 of trading days, the 20 day put call ratio has been below 0. 7, meaning calls have been outstripping calls by a substantial margin not only that, whats more important is the fact that 75 of single Stock Options volume is now traded in options that expire in less than two weeks. Short dated options like that have a high amount of gamma. What that mean is that Market Makers trying to delta head their exposure can sometimes go from buying a lot of stock to substantially selling that stock in a short amount of time. When you have less liquidity, you see selloffs like we saw here over the past couple of days if you look at the concentration in the short dated out of the money call option, it is contained to a few names, predominantly the faang names weve seen so i think the sell off is fairly contained and as carter said, as you can see in the small caps they did not participate in the rally they also didnt participate as much in the decline as well. From my perspective, i do think that the sell off is is it fairly contained i think the lesson for Retail Investors is to generally stay away from these short dated out of the money call options. While i dont have any hard data to back this up, im willing to bet over the last tenplus years of options action there probably have been very few trades that have been traded that are one to two weeks out that are relatively far out of the money. Mikes been here the whole time so have i. Mike, just quickly, in terms of what you made of this selloff this week, what stood out to you . I think whats old is new again, really. You know, a lot of what we saw coming into this week reminded me a lot of what we saw in 1999 and early 2000 what we saw was a lot of speculative and excess in equities we highlighted this a little bit last week and we talked about it a little bit this week too when youre about to see a blowoff top, one of the things that often accompanies that is as you hit new alltime highs, volatility starts to rise as well thats an unusual circumstance, because normally we associate steadily rising markets with declining volatility i think that usually signals that greater level of uncertainty and speculation, fear and greed battling each other out right there. And, of course, then you get Something Like what we had as carter pointed out, what we saw yesterday was quite extraordinary. He was talking about the tech sector i was looking at it from the perspective of the s p which is largely what we tend to trade. There too is a very unusual set of circumstances if were looking for analogs in history, you have a couple of circumstances, like the credit crisis, the tech wreck, the u. S. Credit downgrade, things like this what happened thereafter and whats interesting to me i that if we take a look at situations where the market rocketed higher after a steep decline, they were usually associated with near term 52week lows thats not what happened here. So we have to sort of eliminate those among the possibilities and then start focussing on other analogs. When we look at that, i get a little bit less rosy im not really that optimistic is there a possibility we get 10 upside between now and the end of the year . I think so but i also think its possible thats that were not done. If you caught the show last week you might remember mike said it was time to hedge and he offered up a way with the qqq. Instead of looking back on that open trade, were going to look ahead to how the market could affect your position next. Mike, well go back to you on this. One of the things that happened in a situation like this, you might feel, gee, last week mike was talking about a hedge, now ive missed my opportunity. But actually, something that has happened, because of this big increase in volatility is different opportunities have actually presented themselves. I was looking out to november, the 260230 put spread and then selling the 305 calls against it this is what we call a put spread caller, doing this trade, buying the 260 puts, selling the 230 puts and selling the 305 strike calls when i was looking at that early this morning, right after the open, you could put that trade on and actually collect about 6. 60. That represents about 2. 3 of where the qs were trading at the time lets take a look at what happens. You still get exposure, up 10, 11 or so. If the market declines, if the qs fell to 230, that would be a decline of about 18 from where we closed the day today, you would have hedged about 75 of those losses. So you get definite asymmetric risk reward here if the market goes sideways, youre going to collect the premium you would have to begin with, thats a yield of about 3. 2 a few things can happen. The market rallies, youre going to keep those gains. If it goes sideways, youre going to yield 3. 2 . If it declines youre only going to suffer about 25 of the losses of the broad market on an 18 decline or so. Two things can happen that are good one is certainly much less bad that only sets up because of that elevated volatility heres something to think about, those 305 calls im talking about right now, those were trading over 12 this morning. Thats the same price they were last friday with the market higher all of that is a function of the increase in options premiums. Tony . Quick thoughts the fact that mike is able to take advantage of the elevated premium is what makes this tragicive. The ability of the market to stay 2 , and if you do get tha acceleration of the downside, your hedge almost 75 of your losses to the downside i think this is a really smart move. Check out our website optionsaction. Cnbc. Com while youre there, sign up for our newsletter heres whats still ahead. Still to come, the trauma is over but the triage begins more ways to rebuild and reenforce your portfolio cautiously plus, calling all options action fans. Reach into your pocket, grab your phone and tweet us your question optionsaction. If its nice, well answer it on air when options action returns. If i could, baby id how can i, when you wont take it from me you can go your own way go your own way your wireless. Your rules. Only with xfinity mobile. Welcome back to options action. Weve got a news alert on tesla. Take a look there. Shares are down by 6 after hours possibly as a result of not getting added to the s p 500. The index just announcing that etsy, paradigm and catalyst would be added to the index. But the notion it would be added to the index is one key driver in this tremendous rally, carter, that we have seen. By the way, we saw heroic rebound in todays session in these shares that might be the key point is what you said if you think about where its indicated right now around 391, 392. Todays low was 272. Even with this post close setback, it hasnt undercut todays low from which that violent rebound occurred the real issue as always is what is the upside. The upside is capped, i would say. Thats important its important if one wants to stay long for hedging action in the market lets take another look at todays selloff which capped off a brutal couple of days for the market obviously big tech took the beating. If youre wondering how to protect other parts of your portfolio, we have a way to do it thanks to mike. Mike, take it away i was taking a look i think many of us were at those sectors that might actually create some measure of outperformance if we continue to see weakness in tech we had begun to see some green shoots in terms of rotation into financials over the past couple of weeks tony was actually talking about that in Morgan Stanley last week the thing is even though theres good valuation story here and even though i think the momentum is starting to turn in financials favor, i also think its going to be a bit of a grind. Theres a couple of reasons for that for one thing, obviously we just saw the market get shellacked when you see that thats going to create reluctance on the part of the investors to do i have in and the other thing theres a difference of opinion. Consider what General Mills was saying at the end of the last show, saying that kbe wasnt necessarily poised to take off then you had the possibility that citi could obviously do a little bit better. Theres a divergence of opinion. Another thing to consider, of course, options premiums are elevated if were trying to look for a hedged way to make a bullish bet, we have to find a way to mitigate that. I would take a look at xlf, a die nagonal 26, 28. Buying the november 26, selling the october 28th you could spend about 1 to do that trade the 28 strike obviously representing an increase of a little bit than 10 . The way to think about this, its a little bit like using a hedged overwriting strategy. Being protected because youre trying to take a call and then selling. I think this is a way to play potential rotation but being cognizant that were in volatile times. Lets get back to technology now, which is the home of the most widely held stock in the market, which is apple, which is down more than 5 this week alone. If you think the bottom is about to fall out of the tech trade, dont panic. Tony, walk us through it my play on apple is really a continuation of our previous discussion about how i believe this selloff is going to be contained here with the volatility weve seen over the past couple of days. If we look at apple were using apple as a proxy here for the nasdaq 100. If we look at the chart, theres no question about the strength of this particular chart relative to the technology sector, relative to the market and arguably one of the stronger fundamental outlooks within the tech sector. This chart so from a technical perspective, a fundamental perspective, i like it and i like the fact that it got back below the 20day moving average. Thats the opportunity i see for a potential long opportunity whats interesting is something that mike laid out about the vix and the s p 500. Is that the apple implied volatility, the front month implied volatility has increased over the past couple of weeks as the stock has reached alltime highs we have this elevated implied volatility thats what im looking to take advantage of of selling some premium and collecting some volatility so even if apple stays sideways or moves higher, im going to be able to profit from this. So the trade structure im looking to use here is to go out to october and im looking to sell the 115, 105 put vertical here, collecting about 8. 60 for that 115 put, paying about 4. 45 for that 105 put net net im collecting 4. 15 on a credit spread thats 10 wide. Im collecting 41 of the width on a credit spread thats a few bucks out of the money now, im only able to do this because of the extreme stress or the extreme elevated volatility were currently seeing in this particular name. This strategy has a break even price of 110. 85. Which happens to correspond with the intraday low that apple put in here today. As carter and mike laid out, there is still the possibility this tech selloff is not done which is why im using this put vertical structure that has limited risk. So even if this continues to accelerate to the downside im only risking 5 of the underlying stock price to take this bullish view. Mike, what do you think of this trade theres three things about it first of all, i think selling credit spreads, if people watching are thinking about dipping their toe into the options market, these might be the best strategies you could contemplate as a way to get started because you limit your risk and the probability of profit is on your side the other thing is how much hes collecting with the strike thats obviously very good what im less excited about is apple itself apple right now is trading about 37 times forward earnings. This is peak valuations for a stock thats trading well above where it was before we saw the covid draw downs this is not the material draw down we saw has brought us back to entry rates we saw before f very, very far from it when you consider the stock was about 80 on this post split basis before we saw the pandemic pullup thats a significant discount to where the stock is trading right now. To me, i absolutely love the strategy i like the math on the spreads obviously this is going to depend a little bit on your view on apple, but im not bullish on opal here. How does apple look, carter it was another stock that had a great rebound in todays session. It did. Look, its beloved we started by saying its the most owned, all of this segment. Heres the thing, if you can drop 19 in two days, its safety that its perceived to be is just in the eye of the holder meaning, it is until it isnt. So the real question is just knowing that this stock has had five 35 plus draw downs over the past decade. 1 in two days aggressive, i think you do have to have an Options Strategy because theres always the potential theres another down. Up next, you still have more questions and we still have at least some of the answers. Your tweets and the final trade. Stay tuned i have an idea for a trade. Oh yeah, you going to place it . Not until im sure. Why dont you call Td Ameritrade for a strategy gut check . Whats that . You run it by an expert, you talk about the risk and potential profit and loss. Couldve used that before i hired my interior decorator. Voila maybe a couple throw pillows would help. Get a strategy gut check from our trade desk. That selling carsarvana, 100 online wouldnt work. But we went to work. Building an experience that lets you shop over 17,000 cars from home. Creating a coast to Coast Network to deliver your car as soon as tomorrow. Recruiting an army of customer advocates to make your experience incredible. And putting you in control of the whole thing with powerful technology. Thats why weve become the nations Fastest Growing retailer. Because our customers love it. See for yourself, at carvana. Com. Its a thirteenhour flight, tfifteen minutes until we board. Oh yeah, we gotta take off. You downloaded the Td Ameritrade mobile app so you can quickly check the markets . Yeah, actually im taking one last look at my dashboard before we board. Excellent. And you have thinkorswim mobile so i can finish analyzing the risk on this position. You two are all set. Have a great flight. Thanks. Well see ya. Ah, theyre getting so smart. Choose the app that fits your investing style. Welcome back to options action. Time to take your tweets our first viewer asks any thoughts on fedex. It has held up strongly the last couple of days i currently have a vertical put spread tony, what do you tell matthew i like fedex. As he said, its held up pretty well as to whether or not he should hold onto that trade, it really depends on your cost basis if youve already collected more than 50 of the max profit, its time to take profits you still have 40 days left to go if you havent reached tha level, i think its worthwhile to potentially hold it through earnings because your break even is pretty far away from where the stock is trading now. Carter, what do you think of fedexs strength it is the number one constituent waiting in dow jones transports transports had a very big day up i like fedex. Our next viewer asks if im neutral to bearish on lululemon going into next weeks earnings, what is a good way to play it with options this one obviously has to go to mike, because he has an inside track on this stock. Lulu is on the holly index, one of my wifes Favorite Stores for sure she still loves the product. Do i love the stock with the current price . Not so much. Its close to alltime highs i think your perspective is the right one. Right now we have elevated implied volatility look to sell upside call spreads. I think thats the way to make the play here. What do you think of the chart, carter . We had that call on lulu today the analyst at citi went to a neutral on it. Raised the price target and basically said i cant probably recommend it at a buy right now because i cant recommend a lot of upside from 400 right but raised the price target. Its all hard to contend with. What we do know is it dropped 50 during the pandemic selloff thats considerably more than the overall market obviously its recovered considerably more. By all accounts, the word rich or full comes to mind. The stock is full. I would say trim, take measures. Tony, would you also agree that the stock is full this is one that is beloved, obviously. People wearing yoga pants all over the place, especially during quarantine. Absolutely, especially with peloton announcing theyre going to come out with a new bike and a new treadmill and competing with lululemon on the mirror side i do think that there is theres limited upside her for lululemon. Three bears on lulu way to end the show. Time for the final call. Carter braxton there is an expression, first loss, best loss. Were sellers of the qqq. Tony zang i dont think this is the end of technology. I still have faith in a name like apple im selling put vertical credit spreads on apple. Mike khouw . Has holly reduced her spending at lulu during the pandemic . No, she hasnt actually she actually bought a big rowing machine which she uses almost every single day so good for her. I havent been so good about things i will say this, where one opportunity is lost, another is gained elevated implied volatility makes put spread callers on the qqq in a way you can still hedge come of the gains weve seen and you still have some gains to be hedged. All right that does it for us here on options action well be back next friday at 5 30 p. M. Eastern time have a great long weekend. Do not go anywhere a special cnbc Summer School is in session right after this. Im searching for info on options trading, and look, it feels like im just wasting time. Thats why Td Ameritrade designed a firstofitskind, personalized education center. Oh. Their awardwinning content is tailored to fit your investing goals and interests. And it learns with you, so as you become smarter, so do its recommendations. So its like my streaming service. Well except now youre binge learning. See how you can become a smarter investor with a personalized education from Td Ameritrade. Visit tdameritrade. Com learn its got all my favorite shows turn oright there. Boom, i wish my Trading Platform worked like that. Well have you tried thinkorswim . This is totally customizable, so you focus only on what you want. Okay, its got screeners and watchlists. And you can even see how your predictions might affect the value of the stocks youre interested in. Now this is what im talking about. Yeah, itll free up more time for your. Uh, true crime shows . British baking competitions. Hm. Didnt peg you for a crumpet guy. Focus on what matters to you with thinkorswim. 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