test test test how do i make money in this trade? between 15 and 12, november expiration, i can make between 1 and 9 times my money, between $12 and $9, that payoff trails off dramatically, and my worst-case scenario, the stock's down 50% and i get long at these levels. >> there's a backstop here that i just mentioned and i think they have a good probability of

making it -- >> that's a critical point, a really critical point on this trade, usually when i'm bearish, i hate these, one of the reasons i didn't like it because if you're making a bearish bet and the stock comes in, a lot of times you'll see the implied volatility rise. and this trade isn't going to be working in your favor for some time. you're hoping at that point you get to ride it all the way to expiration, in this particular case, because you have that government backstop, you can feel comfortable getting the stock, long the stock along a lower level. this is one of the few instances i like this. >> got to move on here. your next option, attention shoppers, the world's biggest retailer wal-mart set to report earnings wednesday. option prices on the name have tumbled as well as stocks. take a look at this. this is a chart of walmart's volatility versus the stock price, that's what it is to the vix is to the s&p. a snapshot for walmart's option prices as we mentioned before. scott, the volatility down so much, are traders beginning to take directional bets on this

one? >> well, with walmart, options are a great way to take a directional bet. walmart has not participated in a rally, this rally in an environment where this should have been a home run for them and you have to wonder what happens to walmart when new walmart customers go back to the old upscale stores that they used to frequent, but that they were visiting walmart only because of the current situation. so there's lots of downside here for walmart and there's not much up side. given the situation, if option prices were higher, i would normally want to sell the call spread to take advantage of that, but because options are so cheap, instead, i want to use the other side and i want to bui a put spread. specifically i want to buy the december 47 halves, 42 halves spread. i can pay about $1.40 for the spread, buying that 47 half and selling the 42 half put for 80 cents. that's the trade i want to do. there are a couple of questions that come about because of this.

number one, if volatility is so low, that is auction prices are so low, why do you want to sell that downside put? well, there are a couple of reasons. one, volatility that is option prices are cheap, they're not free, and i can cut the cost of this spread by about 1/3 by selling that downside put. another question is why do this in december? why go tout that far? well, i could put the same spread on in september for about half the price. while i would only own the option spread for about a third of the time. >> i actually think that's really important that scott just made those two points and those caveats. listen they have earnings next week, it's nothing, the option prices are very, very cheap. he's looking out to december. and selling that downside put, i think scott's drawing a line in the sand that the stock's not going to go below that. and don't be afraid to do that because you're reducing the price of the option, of the bearish bet you're making. and the only thing you're foregoing is the potential up side. >> in buying a put spread rather than selling a call spread, the

consumer is definitely at a question mark right here. unemployment near 10%, you have to question whether the consumer comes back into the marketplace. buying the put spread, option prices are cheap in some of the consumer discretionary names and consumer staple names, it's a good opportunity to own some volatility there and protect yourself to the downside because certainly there a chance that the consumer lags in this recovery and coming out of this recession. >> right. okay, definitely on the table still. well, fans of william shatner will surely recognize that song. that would be the theme to star trek or some approximation of it. he's also the face of priceline which reports earnings on money. we either made that leap or we're ready to duke it out with derivatives, yes, it's the latter. time for "put up or shut up" where mike and dan agree on the direction of a stock but disagree on the strategy. a price line calling for an 8% move on monday over the last eight quarters the stock has

doubled that. both dan and mike are bearish on the direction of the stock, but mike, you get the first shot here and you've got a put fly. >> yeah, that's exactly right. one quick point about this, the cone census view in this space has been bullish lately, expedia, orbitz, private, this has acted positively up over 30% in about a month, and up, i think, 80% on the year, analysts like the stock, they like it because they have higher exposure to higher margin businesses like hotel bookings, however, in my view when you get into a situation where everybody has a rosy picture, i want to be more of a contrarian. and the problem is that we highlighted right at the top there when the implied move that the options suggests is a whole lot less than we think it might turn out to be, it's not going to be a great time to sell options. i'm going to look at buying a 130, 120, 110 put fly in august. i'm buying one august put, i'm

going to pay $5.30 for that, i'm going sell two, collect $2.25, and buy one of the 11080 puts. why am i doing this? one of the reasons is i want to finance the purchase of the 130 put and i'm buying that 110 to insure me. it can be worth maximum of $10, my maximum up side is $8.20, i realize that at the 120 strike. >> ding, ding, ding. >> that's it. have at me. >> and mike asks why is he doing it? >> again the broker. >> he's doing it. >> watch your limit prices. watch your limit prices when you do a trade like this. >> i actually like mike's trade and it makes a lot of sense here. he dropped a lot of fundamental knowledge on you, that's great. you have to sometimes pick a direction. i want to do the same thing, i want to buy the august 130 put spread. my max gain is $6.75 double the premium i have paid. one of the reasons i like my

trade a little bit better than mike's, i think it's a bit more imaginable if the trade is just in the money a little bit here. it gives me more prerogatives to take it off. the last thing you ever want to do and the one thing your broker does want you to do is take off that put fly. so my trader gives you a bit more prerogatives. >> you got the bell. you got the bell. i'm going to pull out the hook now. scott, you be the judge, who wins? >> alligator spreads and that is commissions eat up all your potential profits. i hope that mike's broker didn't go out and buy that boat yet because dan takes it this time. >> ryan, just quickly touch on you. >> yeah, you know, i wouldn't overlook a put fly, flies actually are the low margin, you have a price target, you have an idea where the stock is going, you don't outlay a lot of money, a lot of risk, and you could win huge if it comes near your strike, which, you know, implied moves on priceline have occurred like that. he's got a bearish look, and you could see it go to 120.

>> we'll keep you posted on what comes out. mike or dan. got a question? send us an e-mail now that our time slot is 8:30, our e-mail address is the same. for recaps of the strategies on tonight's show, go to our website "options action." ge up 30% in the last month, but dan recommended a strategy that returned 300% over that time. we'll give you the next move he'll make after the break. time for pump up the volume, the names are heating up options traders, sizzle index this week. founded in 1992, and listed on the nasdaq four years later, this pharmaceutical company had the most successful antibiotic launch in recent history. shares of this pharma name got an extra injection this week after unusually high call volumes. who is it? the answer when "options action" returns. (announcer) crest whitestrips has created a revolutionary strip...

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call volume today was 16 times its normal level. time for the up side call where we manage some of our more successful trades in a shameless attempt to curry favor with the big wigs here at our parent company. both dan and mike suggested bullish options strategies on general electric stock.

the stock has been on fire, but as the options trade that truly paid off. on options action, we're always looking to put the odds in your favor. but sometimes we can't help putting on the risk if only to try to make more. case in point, dan's ge strangle. >> i want to buy the august 10 and 11 strangle. >> reporter: when they buy strangles, they're making a bet on a big stock move by buying one out of the money call while simultaneously purchasing one out of the money put of the same expiration. in dan's case, he bet that ge stock would have a big run, either up or down by the end of august. >> going forward, i think it has a potential to be volatile because like i just said, it hasn't found a home yet. >> so he bought the august 11 strike call for 65 cents and the august 10th strike put for 50 cents, paying a total of $1.15, that's the most he can use on the trade. but why did dan buy both the call and the put?

because he didn't know which direction ge stock would go. so buy owning both the call and the put, he profits if ge stock goes either up or down. >> i want to use ge as maybe a proxy for what could happen in the market if we are truly at an inflexion point. >> dan's odds of success are low because he bought not one, but two out of the money options both of which decay with each day. and unless ge moves by more than the cost of the trade of expiration, dan loses money, in order for dan to profit, he needs ge stock to trade above the 11 strike call he bought or below the strike he bought. above $12.15 or below $8.85 by expiration. and since dan put on the trade, ge stock has been on a tear, rising more than 30%. now the man some call simon

cowell's muse must make a choice. that's because with each passing day, dan's strangle becomes less valuable as those options head towards expiration. should he tighten his grip in the hopes of even more ge gains or simply take profit? with the home team stock in the gutter and the most important shareholders are glued to "options action" and they all want to know the same thing, what will dan do now? now at the time of the trade ge stock was $10.70, so if you bought 100 shares, you would have risked nearly $1,100, made about 30%. but strangle cost about $115, currently worth $370, that is a return of more than 300%. strangles can be a hard trade to win, your case, it actually paid off big time. >> it did pay off. you know what they say, about a blind squirrel, every once in a while finds a nut there. and i think it was also voted against this one on this package. the only thing to do here now is to sell that call, the put is

worthless, you don't sell a worthless put, you sell that call, you move on, you look for the next trade. one thing i would say is at the time, mike offered a very interesting trade too, and it had a different risk-reward parameters but also very profitable in the same thing. every once in a while you can use single stocks to play potential inflexion points. >> i agree with that wholeheartedly. he's actually put on a couple of long premium trades and they've paid off really nicely. i usually try to take a lot less premium risk and so my trade involved selling downside to buy up side calls, but that was a great call on dan's point. >> and the key point here, the keyword inflexion point. you use options to buy when you're at inflexion points in the market. options were not created for you to take stpeculative plays. dan had that theory, they were at a great inflexion point, it's going either a lot lower or ge was ready to move higher. he made the right call and had a

great thesis in it. that's when you use strangles and straddles to play the market. >> do you think the run in ge stock has anything to do with the fact that options action is moving to 8:30? >> i thought it was moving to 7:30 central time. that's when i'm going to be watching it. >> good way to bring in the midwest. >> chicago is the center of the world, right? >> center of the options world. >> it would be. got a question, send us an e-mail, we'll answer it during our options action 101, and we'll answer it next week at 8:30/7:30 central time. go on to our website, it is your chance to ask a question, our chance to educate you. that's right after the show. welcome to the now network. right now

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time now for the final call, the last word from the options pit. brian, kick it off. >> i think they're a little overprotective, i'd be buying near term, selling a couple of calls out in the money against it and look for the market to move higher over the next couple of weeks. >> scott? >> i'm watching my december put spread in walmart before earnings. >> dan? >> i'm not looking to capture, i want to make bearish bets, look to november 15. >> mike? >> well, first of all, i can't say i entirely agree with brian. when you stretch the rubber band as far as we have, you might expect it to come back a little bit. the thing i'm looking back is the priceline put fly. >> looks like our time has expired. for more options action, go to our website cnbc.com, our thanks to the traders, we'll see you back here next friday at 8:30 eastern time. reset your dvrs, see you next week. >> friday night, the action

heats up earlier. options action now at 8:30 eastern. learn the smart money moves from our team of options traders. options action 8:30 eastern cnbc fridays sponsored by think or swim.

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i'm jim cramer. welcome to my world. >> you need to get in the game. they're nuts! they know nothing! >> i always like to say there's a bull market somewhere. >> "mad money," you can't afford to miss it. hey, i'm cramer, welcome to "mad money." welcome to cramerica. i want more days like today. my job is not just to interstate, but to educate, so call me. with today's fantastic rally, taking the dow of 114 points and the s&p up 13, should we be afraid that the markets reached nose-bleed section heights? can we justify the moves we've seen this week? are they simply dangerous, setting us up for a jimmy clip

"the harder they fall" moment? >> should we be frightened? should we be scared by citigroup's 68 cent run this week? is it up? cisco's up from a quarter where terrific ceo john chambers signalled a meaningful turn in orders. should we fret that kodak goes higher or cvs has come back and joined the double-digit party? what about the hold builders that are losing money? are they making us complacent? 44% of the mortgages are under water? way more than the 14 million homes bought when we thought it had been can cordened off? isn't it perilous for hartford to be up so mu