that's all for us on tonight's "cnbc reports." have a nice and safe weekend. here's options action with melissa lee. welcome to options action, your front row seat to the front

money. i'm melissa lee. here's where the action is tonight. im posters, aig and fannie have grabbed the headlines. it's the options activity that has the smart money excited. we'll tell you why. christmas in december, one trade that could protect your portfolio up until december. she'll tell you what it is. and dan and mike nail target they correctly call dell on earnings. >> i think they're poised to move just by the 15 call. >> now, we'll see who made the most money. options action begins right now. welcome to the show, great to have you with us. these are the options action traders at the desk at the home of the world's third largest market in the windy city of chicago and city of brotherly love, philadelphia. stocks closing off their lows but still break an eight-day winning streak, this despite upbeat news out of intel and

dell. temporary rest stop or perhaps start of a correction. the dash for trash started with citigroup and aig, we could have expensive garbage as aig is joined by fannie and freddie, all up 200% this month alone as shorts continue to get squeezed. options trading, 16er heads are prevailing, energy stocks and home builders start to move sharply. this does seem good news for the stock market to see this rally broadening out. >> i think that's true. two things i'm looking at i think are encouraging. the first is seeing bets that volatility will come in. we saw that in the form of somebody who came in and paid for 25 puts and bet volatility will decline. that's a good thing. when volatility comes out of the market, encourages more participation and will encourage a broadening of the rally.

home builders, we saw somebody sell 11 puts and and 18/20 call spread, if you're willing to draw a line the sand and say, i'm willing to get long, that's good sign, conoco phillips, we are seeing a number of things, all very encouraging. >> what is optimistic, not only broadening out but, scott, buying in tech land, a good sign the leadership of the market, some is continuing to move higher or at least optimism that is happening. >> that's right. we know tech has to participate if the entire market will turn around. we've been waiting for that to happen. we had good news today and intel led the way, instead of rushing out and buying stock, we saw up side call buyers, sub20 into and october 22 calls, people buying those calls instead of rushing out to buy the stock. in october, we saw 40,000 calls

bought, pretty impressive a. lot of traders want to steal second without taking their foot off first base first and a good way is buying calls. >> looking at transports out there, specifically shippers actually transporting goods, that would be a good sign. >> certainly, talk about broadening out the rally to some names underperformed a lot of dry shippers pretty stagnant thh past couple of months, volatility not that great.h one thing i noticed china cosco came out with things that beat expectations the other day and h got people excited about economic activity going forward you saw a ton of call buyers not in just one dry ship name but a ton of dry ships you. saw call buying, $26 in calls thursday, september 26 calls, you saw continued optimism, if h the market is going to continue to rally, you need to see real

economic activity not funny h money stimulus package type money and you will see that in dry shippers starting to move higher and why people are buying calls in that area. >> stacy, what we're hearing from the guys is call buying, is that increased in the options? >> i think what's more interesting what we're seeing in options, call is great to see when buying volatility, always a good sign to see believe it or not and like to see volatility buyers in options market especially on the call side. what's fascinating the risk appetite seems to be increasing, by that, some of the trades being done where they're selling puts or 1 by 2 puts, buying one put and selling two puts against it you don't dine market you think will completely fall apart. these are trades to be fair, people blew up on a year ago, trades people thought they knew where they wanted to get in and out of stocks and stocks got there much quicker than expected, they weren't happy. an example would be union

pacific, unp, we talked about the rails, there were 1 or 2 put spread buyers. unp, we saw call buyers, put sellers, going to the tech sector scott had highlighted, looking at the smh, semi holders, we saw put sellers in october, rolling short position to rolling it to october. we also some january call buyers in this semiconductor index. there's a little bit of everything going on. most fascinating to mike's point, vick's trade suggesting it may stay here, people are picking levels they're comfortable with stocks. >> stacy, i have to ask you quickly, people blew up with these traced before, what are you saying you suggest this will be it? when i look at this, one of the things i think we have now, a lot more information. people blew up before, there was all kinds of questions and now you can actually draw those lines in the sand and when they make sense. would you axwree with that. >> absolutely.

you just didn't know what was going to happen a. year ago, you clearly weren't expecting what happened six months ago, now, we're in a situation we know what's happened. most people would agree, we're out of the really really dark area here and you can start to look for levels in stocks, where you may be kfrptable buying it if things start to get irrational. i think what we're going to see and scott has mentioned this a number of times, if things get crazy, people will get out quicker this time around. >> you have an overriding strategy on oil services name specifically. >> what's different about overriding strategies, implied volatilities and realized volatilities are lower than they have been and doesn't mean it's not the good time to put it on in the right name. some oil stocks have lowered this year and national oil up over 50%. if you're long in this stock, it might be a good time to look at selling up side calls because the volatility is higher than the one actually trading.

if you had this run, just because it won't go up another 50% doesn't mean the market isn't generally going higher. i would sell the october 40 call you will collect 1.50 and give yourself additional 1.50 protection and participate up to 40, you can make up to 4150 there. i like that trade. >> this makes sense. if oil is fairly priced between 72 and $74, seems likely now, only a couple things move oil, one dollar, another general turn around in the economy, this is the way to take advantage offer the fact oil is fully priced. >> now putting off the risk where traders show you how to use options to protect your portfolio. no sector has done better than technology. the nasdaq, believe it or not is just 10% away from its pre-lehman collapse level. with moves like that investors are looking to protect profits and tracy has protection all the

way to december, an early christmas present. what are you looking to do. >> glad you used the word christmas. the strategy is christmas tree and some of my colleagues will say, i can't believe you mentioned christmas tree. last week, they highlighted the 1 by 2. this is a variation on that trade. what i'm looking at here in the qqq is somewhat aggressive at the money put, any sort of pullback here. i'm looking at the 40 strike put in december offered at $2.15, going to sell against that the 36 strike put, which is offered 95 cents. instead of selling two of those similar to dan's, i was looking down at selling the 42 strike put, 40 cents. it will cost me 80 cents for this entire package assume ig gave the correct package, this entire package buying the 40

put, selling the 36 and selling the 42, paying 80 cents, a third of the price what that 40 put strike is costing, what is happening and my payoffs? what am i doing? i'm protecting myself 10% with the spread. my break even is much further down in the qs at 28.80. you're looking at 32% pull back before you get long in the market. i'm not concerned i walk in one day in theed market is down 30%. if that was my concern, this is not the trade i would recommend but if we have a slow grind and people get nervous and start to pullback, i like this trade selling those two options financing at the money. >> brian, is this the way you would protect your tech portfolio? >> stacy, i'd like to thank youh the quad call you put out, i puh that on and it was a huge h winner.h i'm sticking with you on the quad qs. it's never too early to mention

christmas this is a way to look at it and protect against gainsh tech has had an amazing run and this is the way to protect h yourself. there are a lot of names.h if you don't own a huge amount of nasdaq 100 stocks, you only own three or four or good h handful of stocks, take look ath down-side put 10% out of money h not a bad way to protect h yourself and outright buy that h put.h puts are very cheap, buy some less than 3%, cisco, intel, h google, all had great earnings h reports, the stock ran up, you can buy puts less than 3% valueh of the stock and protect yourself to the down signed get specific protection on the names rather than broad-based index protection. >> you make the claim high protection there but for other indices, it may not be the way to gohedging blue chips. >> it is more to techniques than say the s&p is to broad --

>> caterpillar. >> industrial. >> let's move on here. that's right. that would be the theme of 2001, a space odyssey. a subtle nod for you, some might say space-aged set but perhaps those that know this show know if there's cheesy music, it can only mean one thing, thoughtful discussion meaning derivatives, time for a shut-up or put up on derivative stocks but the right story. the judge herself steps into the ring, stacy versus mike. we know dan can't possibly lose or maybe he can find way. you're at the beach there. jc penney released sales figures, mike and tracy are bearish and most agree the future is bleak for jcp and the stock has had gains and nice run-up so far.

enough with fundamentals, we're here to talk options, mike, kick it off. >> this is a stock up 60% on the year, 100% off its lows, you compare it to the other retailers, you were taking a look at the graf of its revenues over the last six or seven years a you'd notice they are stagnant. after a run like that, i have to feel like i want to protect my gain, i will hit the pause button going into these numbers. we're going into september occasional lay wooly month for the market and going into figures i'm not sure what's going to come out, i've had a good run hit the pause button a zero cost. what do i mean. >> buy the down-side october 29 put that will cost me about 50 cents and sell the 33 calls in the same month to finance that collecting about 50 cents. that's why i'm saying it's approximately a zero cost caller basically i'm hitting the pause

button. >> perfect timing, mike. stacy, judge, you're looking for more aggressive protection with your trade. >> the company just reported earnings. my concern is more to the down side. mike and i are perfectly inline with our thesis. i was looking at the 30 put off 30 cents and offer me protection roughly 3%, goes back to the fishbowl one of the group i want to finance this. one of the things i found interesting the october volatility was trading slightly over september. i think september will be an intere interesting month. i think october is an interesting sell. i want to finance my put purchase by selling a 34 strike call, in october trading 85 cents. i will collect a nickel for this trade, protection down 3%, my stock will be up roughly 10%. >> the new judge for tonight gets to rule, mr. scott nations.

scott, what do you say? >> i like the fact stacy's strategy offers more protection and i like the fact she's paying attention to the term structure of these options, that october is more expensive than september. stacy wins, mike is second, dan is last. >> dan's always last. >> one thing i have to throw out, scott, thank you for choosing mine, i appreciate the comments. i would like to say my prices were correct, mike athletics i think he picked a point you're collecting a nickel for his. not sure it was all day. >> my guess is it will be -- >> approximately zero cost. >> disagree with the verdict or have a question about options send us an e-mail. the address is options actions at cnbc.com. and next, rally 15% on earnings and strategies to return 160 and 50% respectively. find out how they did it right after this.

>> this is an spemptal drug by glasgow smithkline to treat lupis and since they might be developing a takeover as well, call options got shot in the arm who is it? when options action returns. a a

where were options traders pumping up the volume this week? human genome sciences. >> welcome back to more check out options actions downtown cnbc.com. we have not one but two winning trades. mike sand stacy duked it out over jc penney and last week, they duked it out over dell and they were both right. on options action, we're always looking for more than one way to make money. last week, both dan and mike did just that, with bullish trades on dell. that's where the similarities end. mike thought dell would go higher so he bought a call. >> just buy the 15 call. >> a call option gives you the right to buy a stock at a set price, the strike price within a set time. as the stock goes up, so, too, does the value of the call. in the case of mike's trade, he

bought the del september 15 strike call for 45 cents. that's the most he could lose on this trade. >> if you're going to buy options, expecting the move is try to pick a direction. >> in order for mike to make money, he needs dell stock to move in one direction, up, or in his case, up above the $15 level by more than the cost of the trade, or higher than $15.45 by september expiration. on the other hand, dan didn't know which direction dell would go but he did think it would have a massive move either up or down. >> i think that the thing is poised to move. >> he bought what's called a strangle. >> i september. >> what does that mean? it means he bought both the call and the put of the same expiration, but at different strike prices. specifically, dan bought that september 15 strike call that mike also bought for 45 cents, but to complete the strangle, dan also bought the september 14

strike put, which also cost 45 cents. net, net dan paid a total of 90 cents or twice what mike paid but unlike mike he can now profit if dell goes up or down. the tradeoff by paying more, dan needs dell stocks to move more in order to make money. how much more? dan needs dell's stock to trade up or down by more than the cost of the trade, or in his case, above the 15.90 level or below the 13.10 mark. anything less and his trade loses money and since the time of the trade, dell's stock has rallied 13%, making winners out of both dan and mike. one trade, two strategies, and a heated debate of highest intellectual order. >> i was using an organ up here, i think he was using an organ kind of below the belt, i think. you know what i mean, he was trading, if the stock stayed exactly still, i was actually going to make money and you

weren't. >> i think he was using his brain on this one. >> now a victor must be declared and a move made, because with each passing day, both strangle and mike's call lose value as they head towards expiration and time it takes hold. with the clock ticking, "option actions" fans wants to know which one of these guys was using their brain and which was using something else. before we get to who made more money a quick illustration of why we're using options and not stock. had you bought 100 shares of dell you would have risked about $1,500 and made 10%, not bad but had you followed mike's call purchase you would have risked $45 and had a return of 160%. dan's strangle which bet on the magnitude of the move, not the direction t returned about 50% so mike did make more. we'll get to the trade in a second. we should note that dan is on vacation but he did manage to send us a postcard to keep us updated on the trade. "greetings gang. my crystal ball is, if i'm going

to make a directional bet with options i need to have some sort of edge that i feel will give me better odds than a coin toss. having said that with expirations three weeks away my call will decay unless the stock moves higher. my new trade, sell the september 16-strike call for 50 cents and against the 15-strike call i own and create a call spread, locking in some gains and limiting my downside. back to the beach, xo, xo, xo, xo, dan." now we know what dan did and what he's doing right now. mike, what did you do? >> my trade was simpler at the outside and i'm going to sell the call and collect my winnings. >> get a question, send us an e-mail. i do read every e-mail. go to optionsaction.cnbc.com, your chance to ask a question and our chance to educate you, that is right after the show.

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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. >> heading into same-store sales next week i think the jcpenney options are offering attractive opportunities to protect long

share gains for shareholders. >> keep it a merry christmas, look at the put three play, i put that on for protection. >> scott? >> i like the fact that stacey's jcpenney collar pays attention to the term structure so if i'm long jcpenney i'm going to put the trade on. >> mike? >> i'm also looking at jcpenney but look at the zero cost collar, a strategy anyone can apply at any stock when you want to hit the pause button. >> our time ex-period pip go to our website optionsaction@cnbc.com. i'm melissa lee. see you again next week.