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all aboard the recovery train. dennis kneale is driving the recession out and driving profits back in. >> i am selling the hope, baby, and truly believe the recession is over. >> you want a little optimism to end your day? >> there's reason for hope. >> he's the real deal, dennis kneale. watch "cnbc reports" week nights at 8:00 eastern. >> i'm dennis kneale, thanks for watching tonight. have a great what's left of summer. i will see you in september. now stay tuned for "options action." @

♪ see you in september ♪ here we are welcome to "options action" your front row seat to the smart money. the rescue team, why the options market thinks these three stocks could save the rally. we'll tell you why. last call for tech earnings. tech titan hewlett-packard has been on a tear but does smarl money see trouble ahead? we'll give you the setup. and the upside call. stacy told us how to play las vegas sand. >> they were buying the august 10 calls. >> now we'll see if she's ready to cash in. options action begins right now. welcome to the show. great to have you with us. these are the traders at the home of the world's third largest options market that

would be the nasdaq market site and across the nation in the windy city, chicago, as well as the city of brotherly love in philadelphia. stocks rebounding from their morning lows shrugging off weak economic news that weight on industrial and material names, oil falling 4% today and yet volatility continues to ooze out of the market. does smart money sense another leg higher. let's get into the money right now. the market has remained in a tight range over the past two weeks with the s&p 500 one reason the lack of participation from these guys. exxon mobil, procter & gamble and walmart, some of the largest components of the s&p waiting, all down on the year. we need to see participation to move higher. >> there's no question about that. we can't have the market continue to go higher driven exclusively by tech names and a couple high beta names up 150% on the year already. one of the critical things that ties all these names together is the fact a lot of economic data

we've seen as positive, evidence we were coming out of the recession, hasn't been backed up by consumer data. what do these things have in common? consumer names. procter & gamble, walmart and exxon and the integrated oil names in general, these types of names are going to have to participate if the market's going to continue. >> and i don't disagree whatsoever, mike. you named three names that actually make up a big part of the top 15 names of the s&p 500. these don't have to participate at this moment. one thing history tells us as markets broaden out, as rallies broaden out, it takes time. we're going to have some pullbacks here, going to get opportunities to buy these things at lower levels have to show some relative strength on those sell-offs and can't beat tech and financials that lead us the next leg higher. >> volatility coming out of the markets, does that mean stocks will go higher, that inverse relationship we historically see? >> not at all and looking to the options market, what we're really seeing there there's nothing to suggest the s&p 500

is going back to that 600 level but there's also nothing to suggest that we're going to see another 20% plus upside move here. a couple different things i would look at. the types of trades that are out there and that are popular again, these are trades that are protecting some of these recent gains so the s&p 500 up almost 50% in the last couple of months. people are protecting those gains and i think that's a smart decision. a couple things that were new this week i thought were really interesting in the vix options. we saw put buyers. let's think about the vix. where it is currently trading is suggesting one to two days a week we may see a move greater than 1% to 1.5%. looking at the s&p 500, let's compare this to january. let's compare this to january where we are seeing moves on average of around 5.5% so that

doesn't mean we're going one direction or the other. >> scott, you are of that camp of the sideways market. do you not think we'll see a catalyst in the next few weeks? >> and let's look at the names the guys mentioned earlier. walmart, this is an environment where walmart should be hitting the ball out of the park and they had tepid results in the latest earnings cycle. something like exxon mobil, exxon mobil has, well, with oil at $70, exxon mobil would do well in an inflationary market. with the vix coming in at 2% this week, it points to the market is likely to bounce sideways for a while. >> i just want to cut in here. we're at a huge inflex point in the market. we can't get through this really big resistance level at 1015. the implied volatility has come out of the market. buy yourself some protection. it's there. it's cheap. you know what, it will help you

sleep at night. >> i agree with that wholeheartedly. we're not saying the market is going 20% higher but it won't go 20% higher without the participation of some of these names. >> right. >> we're going to need to see some evidence the consumer is part of the recovery. >> i think everybody here on the desk basically believes we are going to see a sideways market, we're going to chug along. you have a good overriding strategy that could provide deal enhancement in terms of returns already in your portfolio. >> absolutely. caterpillar is a prime example. we've seen volatility come out. this one on a relative basis hasn't seen that same decline yet in terms of return it is up there. it's up around 50% just in the past month. this is an unbelievable performing stock. what i would do if i owned the shares here, to dan's point, you could turn around and buy protection. given that caterpillar has premium levels that i think are rich on a relative basis, i'd much rather sell premium and this particular case looking at the november strike call, $2.50

bid. my own shares, i can sell those calls against it, take the premium. if the stock continues to rally, i will participate for 15%. if the stock declines, i collect $2.60, it will give me roughly 6% protection on the down side. riven the rally here, where the volatility, the premium levels are trading, i love this trade for a long shareholder. >> dan, what do you make of this? >> i like the trade and i'm going to take it a step further. in this market you want to create buffers to the stocks that you own and that's a great way to do it. i'm going to take it a step further and say the collar, sell that upside and buy it and try to do it for no cost to you and you basically sit there with the stock and you're protected. >> let's move on to your next option here. the last of the tech titans earnings, that is, hewlett-packard shares along with the rest of the large cap techs have been on fire. the company will report on tuesday but options traders are lining up tonight so what do they expect?

s go in the zone. a 4.5% move, less than the 6% the stock has averaged over the last four quarters. dan, you are watching this name. what is your trade? >> the trade very simply is the mode is priced very fair, okay. other than one outsized move, it really moves about 3.5% or so. so one of the things i want to do, the stock is up 20% since ibm reported in mid-july, i think it's really kind of incorporating a beat and raise scenario for the current quarter. the market is overbought here. if i own the stock in my portfolio, i want to find that protection we're talking about. i want to do a collar. i want to sell the august 45 call for 65 cents against that long stock and i want to use that premium and i want to buy the august 42.5 put. that is for zero cost. i own my stock. i'm protected below 42.5 around the earnings event that could be volati

volatile. here is the down side. your stock can be called -- if it has a big of mo, higher. willing to forgo that move with the 20% move we've had. >> couldn't you also capture some of the upside? you've seen this 20% rally, one of the things you could do is buy that upside call and sell the stock. wouldn't that also achieve the same result? less down side, you can still participate. >> we need to own stocks, right? we all have these fancy portfolios. i'm offering a strategy that helps you sleep at night. it's a risk management trade. >> the thing about dan's trade, this is the type of profit scenario that only works when you use options. it's to put on this collar and it's intended for a very short term period because of -- because we have earnings coming out. so rather than simply bailing out of the stock to protect any gains that you've had, you have to use options to get this kind of a profit portfolio. >> one thing to throw out there, my mom told me, why don't you pick dan's trades? one of the things i would say about this is i love this trade. i really think it's a fantastic trade heading into an event for

someone who owns the stock. key point here and this applies to the caterpillar trade as well, a great overrider, meaning someone who sells that upside call, knows when to buy it back. if they blow out earnings and you don't want your stock called away, recognize you may have to buy that callback but you know that going into it. if they have terrible earnings, you have that protection. >> is this a strategy you imply, overriding, that is? >> absolutely. i love to employ some overriding strategies particularly when we see volatility out of the market and we think the stocks aren't going to be moving around a whole lot. had helps mitigate the down side and gives us yield enhancement. i generally like the type of strategy. >> stacy's mom likes your strategy as well. oh, listen to this. this is a song that mike played on the way over here to the nasdaq. i'm talking, of course, about rollout by ludacris. mike's either about to bust a move or he and dan will compete

it out. i think we're going to duke it out. anyone who watches the show knows it is the latter. time for america, no, the world's favorite segment here. it is time for put up or shut up where dan and mike agree on the direction of the stock. tonight they go at it over target which reports earnings on tuesday. both are bullish on the stock. target could benefit from a consumer led recovery. both think the stock is ready to catch up to its competitors. that's where the similarities end and that's where the fundamentals. let's talk options. dan, you're first up. >> one thing. maybe my mom should play bridge with your mom. if my mom is wondering why you never pick my trades either. here's one thing at target. walmart just reported, we talked about it, the sales wasn't great by any means. target isn't going to be great either. we've seen some comparable sales. one of the things they're doing very well is managing costs. so here's the trade i want to do. it's a tactical trade.

i don't want to own the stock here. i want to buy an august 42 call spread and pay 65 cents for that. what am i doing? paying 85 cents for the august call and selling for 20 cents the august 44 call. my gain is $1.35, two times my premium. the trade is for one week and i'm thinking that target manages costs well, they may be able to actually save some comments -- make you feel better going forward about the stock. >> time's up. mike, you're up. >> all right. first thing, i like the fact that mitigates some risk but that's not the way i'm going to play it. anybody who's ever watched know i typically don't like buying vertical spreads going into a catalyst. in this instance i'm going to sell a vertical threat. sell the 42-40e spread. i'm going to collect 20 cents to do this trade. my upside is unlimited. my down side is $1.30 and that's

what i'm going to take a look at. i don't like the idea i'm going to get into a trade that isn't going to really pack a punch if i'm right. >> potentially risking more but potentially gaining a whole lot more. stacy, are you going to make your mom happy or what here? >> dan, i hope your mom will give my call anyway and play bridge. i'm going to have to go with mike on this one. one of the things i don't like about dan's trade, i don't like 20 cent calls. i do like mike's strategy. i tend to agree with mike. i like selling verticals heading into events most times. i like both strategies in terms of risk. at least compared to buying the stock which would cost you significantly more and put you at significantly more risk and ruling i have to go with mike. >> sorry, dan. it's not personal. >> mom. >> we're going to make this good, i promise. >> stacy, that's what's so great about it. disagree with stacy's verdict or got a question about options, send us an e-mail.

i do read every e-mail that comes in. coming up next, las vegas shares have jumped 30% since earnings but stacy had an options strategy that returned 100% over that time. how did she do it? time for pump up the volume. got a computer virus? this company makes software that can cure what ails you from malware to worms this company keeps the bugs at bay. but this week it was the stock that set off alarms. who is it?

at one point this week call activity was five times its normal volume for mcafee. you heredia how mcafee calls and certainly this is one that is the subject of perennial takeover chatter. what do you think about it at this time? >> let's go to our playbook that we discussed in the past. does it make sense? there is credibility. what was trading and was it consistent? in terms of trading it was shorter in august and september calls that were bought. i usually like to see longer action sold against it to give it extra credibility to it and

it was one day. the next day significantly less volume. >> dan, you've been following this name as well. >> two weeks ago they put up a fabulous quarter and one of the things i noticed at the time it was one of the very few stocks that was trading at a 52-week high. the stock has been amazingly strong. it has a clean balance sheet. the type of market cap that could get gobbled up, no doubt about it. when you see something like stacy mentioned, that's the first thing traders start to think about. >> time now for the upside call. it is where we take a look at how to manage some of our more successful trades. anyone can get lucky gambling on the vegas strip and wall street. used correctly options can be a great tool for increasing your odds of success. stacy did just that with las vegas sands. on options action we're looking to risk less to try to make more. case in point, stacy's call

purchase on las vegas sands. >> the trade i was looking at specifically were buying the august 10 calls. >> when investors buy a call, they're making a bullish bet the stock will go higher. owning the call allows them to buy the stock and to set a price within a set time period as the underlying stock moves up, the value of that call also increases. in the case of stacy's trade she thought las vegas was going to come up aces on earnings. >> i think it's an interesting story because everybody knows the down side to it. they could face so many things i think could send the stock higher that i was looking more for a play that would have an upside. >> she paid $1.60 for the call. $1.60 is the most you can lose on the trade no matter what the stock does. in order to make money, she needs las vegas sands stock to rise above the $10 level more than the cost of the call option or in this case above $11.60 by

expiration. but if stacey thought it was heading higher, why didn't she just buy it cheaper further out of a money call? because she didn't want to bet the house on a wild gamble. so by paying slightly more for the in the money option, stacey increases the probability her call will have some value before expiration. this is the time of the trade shares of las vegas sands have been nothing short. it's the value of the call that hit the jackpot rising some 100% over that time. now the woman some call the rain man of options is faced with a choice. take profits on her calls or hold out for more gains and risk wrapping out because unless lds stock goes even higher the values for calls decreases as it heads towards expiration next week. now with the clock ticking, options action fans up and down the vegas strip are glued to their tvs. they all want to know the same thing, what will stacey do now.

okay. we don't keep cher and celine dion waiting. if stacey had just bought lbs stock she would have risked a tenth of that or $160 to be exact and she doubled her money which is of course a good illustration of the power of options. okay, stacey, what is your next move now? >> this is one of the situations when i go to vegas i'd rather be lucky and have a short trip. to be very, very fair, this was a play going into earnings. earnings didn't turn out so well but i got lucky because there was other good news in the market and boom, here we are, up 100%. i'm taking my profits and going home. >> you know, one of the things i absolutely love about this trade, we talk about trying to make plays into catalysts. one of the things about lvs, about las vegas, there was

material downside risk. this was one of the situations where it isn't a simple situation about leveraging your upside. you really didn't want to be exposed to the downside and managed to get both ways so that was an excellent trade. >> scott a few weeks ago you used lvs but longer dated options. >> i wanted to boy the 2011 because i stared stacey's opinion about the stock going higher. i sold the upside call because i wanted to reduce the cost of the overall trade but both of these are great examples how options can be used in binary events and there was material downside risk so this was a situation where the stock would be up tremendously or could have had a tough time and that's when you want to use options, when options can pay off. as we saw here. >> and dan, what do you make of using call spreads into an event, a specific event? >> i think they're great. i was slightly critical of stacey's trade, the one she

suggested. i thought the premium was meaty considering the stock rallied 60%. my suggestion at the time was to sell an upside call against it because there was a lot of really good news in the stock at that time and like she said, she did get a little bit lucky. >> better lucky, right, stac sne. >> i'd rather be lucky than good. what did your mom say to to that? was she upset you didn't like my trade? >> we'll get the update from mrs. in a tan next week. the e-mail address is optionsaction@cnbc.com. we'll answer it in our 101 web, your chance to ask the question, our chance to educate you. go to our website pgssaction.cnbc.com, after the show. >> packed with exclusive information and analysis, this is the extra edge you need, it's free when you register or visit the member center at cnbc.com. my mother made the best toffee in the world. it's delicious.

so now we've turned her toffee into a business. my goal was to take an idea and make it happen. i'm janet long and i formed my toffee company through legalzoom. i never really thought i would make money doing what i love.

robert shapiro: we created legalzoom to help people start their business and launch their dreams. go to legalzoom.com today and make your business dream a reality. at legalzoom.com we put the law on your side. time now for "the final call" the last word from the options pit. stacey, kick it off. >> next week's exploration, know what you have and have a game  plan. two if your long hpq stock

headed into earnings, i like  dan's color. >> i'm going to watch both side offed the trader's point volume and volatility. if the big three comes in, the market will bounce sideways for awhile. >> dan? >> i like that stacey likes my call and if you're lucky enough to own this stock in the last month, and you want to take a defensive positioning, be tactical and protect it into next week's earnings. >> mike? >> i'm going to follow something up with hewlett. you want to protect yourself to the downside here but if you want to also participate to the upside, you have some of the stock you might look to sell it now and use some of the products to buy that call he'd otherwise sell. >> looks like our time has expired. for more "options action" go to optionsaction.cnbc.com and get an exclusive hewlett-packard trade from dan in our web extra. thanks to the traders. i'm melissa lee. see you back here next friday, new time slot 8:30 p.m. eastern.

have a great weekend.