to me. when i see the rally broaden, i would like to see it in the bigger names that haven't participated and trading in attraction valuation and telling me that investors think that those valuations are cheaper and we're going to see fundamentals coming to the market. they're seeing actually a lot of buying activity in high beta names which has a lot of grasping at straws kind of a look at it. the upside is, we're still over 30% off of the market's all-time highs which we reached a year and a half ago. nevertheless, what we would like to see is broadening out some solid broadways. that's what we're not see right now. >> at the same time, the whole mantra of traders is you have to trade the market you have. the market is going higher. a lot of positive sentiment going to the market. how do you reconcile the fact that perhaps we're grasping at straws? >> you look at the fact that no trader wants to try and capture the last 10% of the move. and it feels like we have a lot of people who have missed the move that are trying to participate in the last 10% of this upmove, which is really a

recipe for a disaster. it's easy to take yourself for not having goldman but it doesn't make a lot of sense to buy the names like citigroup and some of the names you mentioned, j.p. morgan and goldman, they have reasonable put call ratios right now, one-to-one. the other names that mike mentioned, high beta names have gidty put-call ratios. four puts for every ten calls traded today in citigroup. it seems to me that it's come quite a ways. it might make sense to use some of your profits in citigroup to protect some of your profits. >> watching wells fargo? >> another name in the bank stocks. bearish activity in the next few days. options traders buying puts in september and october and of course going out and selling calls in august. what does that tell me? some of the rally is yet to hit all of the names in the bank -- wells fargo, what used to be a strong name, still trailing some of the banks there right now. but i do have to say, you take a look at all of the bank names

and a lot of them had the sideways actions in the last three months and they're moving up and breaking out of that sideways action. you have to be very careful. it looks like the bank stocks are ready to move higher. >> you think that they're driving the gains that we've seen at this point. >> two emotions here. one emotion, two different times in the little market we've had in the last six months, february, january, march, fear caused the selling. fear of missing the potential bottom. who know ifs it was the bottom or not, fear is driving a lot of the buying right now. the other point i would make is if you reference citigroup, aig, bank of america. if these stocks in particular -- if you look at them, these are a beta trade. and citigroup is a $3 stock. if you're a hedge fund, load up on this thing. you know where the downside is. the call and it's a call with a government guarantee. bank of america, the same thing. aig, the same thing. you can buy lots and lots of

shares you. can you buy cheap puts at this point. because on historical basis, buy volatility. you can ride this trade. a ton of short interest here. and that's what's going on. these are positions where, you know, mutual funds are probably adding at this point. but hedge funds are driving this activity. >> right, but -- >> go ahead, i'm sorry. >> aig is probably a special case here, though. i don't think it's people bailing in -- getting in to aig because they're afraid they missed the boat. it's short squeezing aig. i consider that kind of the outlier of the three we talked about. >> and we want to clarify for all of the viewers out there, volatility on the vix or applied volatilit volatility, it's a proxy. you see volatility coming in, bank of america, the options are getting a little cheaper you. have a trade on bank of america here. >> the stock's had a great run. traded in low single digits back in january. the stocks are up in the high teens. one of the things i want to do

here. the company has made the fine improvements here. they're trying to get that merrill-lynch acquisition in line. they're trying to make some progress here. maybe the stock has gotten ahead of itself. 57% or so off of last september's high. 57.5% off of the january low. and if you look at that on a technical basis, it's a reflection point. so what i want to do in the bank of america is buy the november 15, 121 by two put streds, i want to buy one november 15 put for $1.10. two november 12 puts for combined 80 cents. it costs me 30 cents. how do they play in the trade? between 15 and 12 november expirati expiration, between one and nine times my money. between $9 and $12, that payoff trails off dramatically. the worst case scenario is the fact that it's 50% and i get long at these levels. >> a bock stop here by the government that we just mentioned and i think you have a good probability of making it -- >> that's a critical point.

that's a critical point on this trade. because when i'm bearish, i hate the one-by-twos. one of the reasons i don't like it is you make a bear bet, the stock comes in. you're going to see the implied volatility that melissa just referenced rise. you're hoping you get to rise it all the way to expiration. in this particular case, because you had that government backstop, you can feel comfortable getting the stock long on a longer level. this is a few instance where i like this as a bearish bet. >> your next option -- attention shoppers? walmart set to report earnings next thursday. the stock isn't the only thing that's fallen this year. options prices on the names have tumbled. take a look at this. this is walmart's volatility. the white line is walmart stock and the s&p. consider it sort of snapshot for walmart options prices as we mentioned before. stocks -- the volatility down so much, the traders are beginning to take directional bets on this

one. >> with walmart, options are a great way to take a directional bet. walmart has not participated in a rally in this environment. they should have been a home run for them. you have to wonder what happens to walmart when new walmart customers go back to the old upscale stores they used to frequent but they were visiting walmart because of the current situation. so, there's lots of downside there for walmart. there's not much upside. given the situation, if options prices were higher, i would normally want to sell a call spread to take advantage of that. options are so cheap. instead, i want to use the other side of that coin and i want to buy a put spread. specifically, i want to buy a september 47 half, 42 half put spread. pay $1.40 for the spread, buying that 47.5 put for $2.20 and selling that 42.5 put for 80 cents. that's the trade i want to do. there's a couple of questions that come about because of this.

number one, is volatility is so low, that is options prices are so low, why do you want to sell that downside put? a couple of reasons -- one, volatility that is option prices are cheap, they're not free. and and i can cut the cost of that spread by a third by selling that downside put. the other question is why do this in december? why go out that far? i can put the same spread on in september for about half the price. i would only own the options spread for about a third of the time. >> i think that's really important that scott just made the two points and the caveats that, listen, never implied -- nothing. the options prices are cheap. they're looking at them in december. selling the downside put, the line in the sand, the stock market is not going to go below that. don't be afraid to do that. you're reducing the price of the options and the bearish price you're making. the only thing you're foregoing is the potential upside. >> buying a put spread rather than selling a call spread, the

consumer has a question mark right here. unemployment, 10%. you have to wonder if the consumer comes back in the marketplace. buying the put spread. options aren't cheap in some of the discretionary names and consumer staples names. a good opportunity to own some volatility and protect yourself to the downside. there's a chance that the consumer lags in this recovery coming out of this recession. >> all right, definitely on the table still. fans of william shatner will recognize that song. that would be the theme to "star trek" or some proximation of it. as william shatner fan know s he's the face of priceline. we've made a huge intuitive leap with priceline earnings or we're ready to duke it out with the derivative yes, it's the latter. put up or shut up. agree on the direction of the stock but disagree on the proper options strategy. calling for an 8% move on monday. over the last eight quarters, the stock has doubled that.

dan and mike are bearish on the direction of the stock. but, mike, you get the first shot here. you've got a put, why? >> one quick point about this. the consensus view in this whole thing has been pretty bullish. expedia, orbits worldwide came out with earnings. the stock reacted very positively. this stock reacted positively. up over 30% in a month. 80% on the year. analysts like the stock. they like et because they have higher exposure to higher margin businesses like hotel booking. my view, if you get in a situation where everybody has a rosi picture, i want to be a bit of a contrarian. the problem is we highlighted them there, the implied move that the options suggests is a whole lot less than what we think it will be, it's not going to be a great time to sell options. we're buying a $1.30, $1.8, $110

put slide in august. i pay 130 put for $5.50. sell two of the $4.50 points and buy one of the 110, 80 puts. what do i do this for? i'm buying the 110 to ensure me. $180 to put the trade on. maximum upside is $8.20 and realize that at the 120 strike -- >> ding, ding, ding -- >> that's it. have at me. >> and, mike asks why is he doing it? his broker -- he's doing it -- >> watch your limbs -- >> watch your limit prices. >> yeah. >> i like mike's trade. i think it makes a lot of sense here. he dropped a lot of fundamental knowledge on you. that's great. you have to have the inclination, pick a direction. i want to do the same thing, buy the august 130, 120 put spreads, pay $3.25 for that. my max game is $6.75 double the

premium. the reason i like my trade a little better than mike, i think it's a little bit more manageable if the trade is 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 broker does want to do is take off that put slide, all right? my trade gives you a bit more prerogative. >> you got the bell. >> bearish bet -- >> off the hook now. scott, you be the judge, who wins? >> you know, ends up by alligator spreads and the commissions eat up all of your potential profits. so i hope mike's broker didn't buy that boat yet because dan takes it this time. >> test on you? >> i went over to look a put slide. they're low margin. you have a price target. you have an idea where the stock is going. you don't outlay a lot of money or risks. you could win huge if it comes near your strike which might lose on priceline have occurred like that. he's got a bearish look.

you could see it go to 120. >> keep you posted on what comes out. got a question? send us an e-mail. our time slot is noun 8:30, our e-mail address is the same. call the strategies on tonight's show, go to our website, optionsaction.cnbc.com. shares of ge up 30%. but dan recommended a strategy that returned 300% over that time. we'll give you the next clue he'll make after this break. time for "pump up the volume," the names are heating up options traders sizzle index this week. founded in 1992 and lifsed on the nasdaq four years later, this pharmaceutical company had the most successful antibiotic launch in u.s. history. now expanding the use of the popular drug, the company has been the subject of recent takeover speculation. got a rejection after unusually high call volumes. who is it?

strategy on stock.

it's the options trade that truly paid off. on options action, we're always looking to put the odds in your favor. sometimes we can't help putting on the ritz. if only to try to make more. case in point -- dan's ge scramble. >> i want to buy the august 10, 11 strangle. >> when investors buy strangles, they make a bet on a big stock move by buying one out of the money call by one out of the money put in the same expiration. in dan's case, he bet ge's stock would have a big run up or down in august. >> going forward, it has the potential to be volatile. it has not found a home yet. >> he both the strike calls for 65 cents and the august 10 strike puts for 50 cents, paying the total of $1.15. that's the most he could lose on the trade. but why did dan buy both the call and the put?

because he didn't know which direction ge stocks would go. so by owning both the call and the put, dan could profit the ge stock goes either up or down. >> i almost want to use ge for a proxy of what could happen in the market if we're in ain't inflection point. >> the tradeoff? dan's odds of success are low. he bought one, not two of the money options. both of which decay with each day. unless ge moves by more than the cost of the trade by expiration, dan loses money. but in order for dan to profit, he needs ge stocks to trade above the 11-strike call he bought or below the 10-strike put he also caught by more than the cost of the trade. or above $12.15 or below $8.85 by expiration. and since dan put on the trade, ge stocks had been on a tear, rising more than 30%. now, the man some called simon cowl's muse must make a

choice -- because with each passing day, dan's strangle becomes less valuable as the options head towards expiration. should he tighten his grip in the host of more ge gains or take profits? is the 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? at the time of the trade, the stock was $10.70. if you bought 100 shares, you would have risked nearly $1100. made about 30%. not bad. but strangle cost $115 currently worth $370. that's a return of more than 300%. strangles could be a hard one to win. but in your case, it paid off bigtime. >> it did. they say about a blind squirrel every once in a while finds a nut there. it was voted on this package a list. the only thing to do here now is

to sell that call. the worth let put. you sell a call. you move on. one thing i look to say at the time is mike offered a very interesting trade too. it has a different risk-reward, but it has very, very profitable in the same thing. and i think every once in a while, you know, you can use single stocks to pay potential inflection points in the market. >> i agree with that wholeheartedly. one of the things that dan has done is put on a couple of long premium trades and they've paid off nicely. i usually try to take a little less premium risk and my trade involves selling some downside to buy some upside calls. but that's a great call on dan's part. >> the key point here is the key word, inflection point. you look -- you use options to buy when you're at inflection points in the market. options were not created to take speculative plays at all given costs here. dan had a theory. ge was at a great inflection point. they were going to go lower and financials were going to be in trouble or ge was ready to move

higher. he made a great call. that's when you use strangles and straddles. >> does it have anything to do with the fact that options action is moving to 8:30? >> i thought it was 7:30 central time is the way i'm going to be watching. >> good way to bring the midwest in here? >> chicago is the center of the world, right? the center of the options world, right? >> send us an e-mail. send us the options action 101 extra and next week we'll answer it at 8:30, 7:30 central time. go to our website, optionsaction.cnbc.com. your chance to ask a question and our chance to educate you. that's right after the show. friday night, the action heats up earlier. "options action" at 8:30 eastern. learn the smart money moves from our team of options traders.

time now for "the final call." the last word. take it off. >> options are a little overprotective. selling a couple of calls out of the money against this, and look for the market to move higher over the next few weeks. >> scott? >> watching the december put spread in walmart for poor earnings. >> dan? >> not looking to capture the death rattle in the market. going to make some bearish bats, november 15, 12, one-by-two put spreads of bank of america. >> i can't say i agree with brian. if you stretch the rubber band as far as we have you expect it to come back a little bit. the priceline put fly i recommended earlier in the show. go to options action, go to optionsaction.cnbc..com. we'll see you 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.