welcome to "options action," your front row seat to the front money. i'm melissa lee. here's where the action is tonight.

imposters, aig and fannie have grabbed the headlines. it's the option activity that has the smart money excited. we'll tell you why. christmas in september? one trade that could protect your portfolio up until december. she'll tell you what it is. and dan and mike nail target then they correctly call eed de 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. let's get in the money now to find out. the dash for trash started with citigroup and aig, we could have extensive garbage as aig is joined by fannie and freddie, all up 200% this month alone as the shorts continue to get squeezed. but in options trading, saner 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 buy an 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, you're seeing call buying in tech land, a good sign the leadership of the market, some is continuing to move higher or at least optimism that 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, sub-20 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 that's 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 the past couple of months, h trading in this normalized range.h volatility not that great.h one thing i noticed china coscoh came out with earnings that beah expect takings the other day anh that got people excited what could potentially be an 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.h saw call buying, $26 in calls  thursday, september 26 calls, you saw continued optimism, if the market is going to continueh to rally, you need to see real h

economic activity not funny h money stimulus package type h money and you will see that in dry shippers starting to move higher and why people are buying calls in that area. >> stacey, what we're hearing from the guys is call buying, is that increased risk in the options pits? >> 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 do in a 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. >> stacey, i have to ask you quickly, people blew up with these trades 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 agree 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. 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 comfortable 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 rallied off of their lows this year. 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 stacey has a trade that will offer protection all the way up

until december, that's an early christmas present, if you will. 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. buying one, versus two. 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 assuming i

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 put spread. my break even is much further down in the qs at 28.80. you're looking at 30% pull back before you get long in the market. i'm not concerned i walk in one day in the 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? >> stacey, i'd like to thank you, the quad call you put out,h i put that on and it was a huge winner. i'm sticking with you on the quad qs.h it's never too early to mention christmas this is a way to look

at it and protect against gains. tech has had an amazing run and this is the way to protect yourself.h there are a lot of names.h if you don't own a huge amount h of nasdaq 100 stocks, you only h own three or four or good h handful of stocks, take a look h at down-side put 10% out of money not a bad way to protect h yourself and outright buy that put.h puts are very cheap, buy some h less than 3%, cisco, intel, h google, all had great earnings h reports, the stock ran up, you h can buy puts less than 3% valueh of the stock and protect yourself to the downside, 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 go for hedging blue chips. >> it is nor correlated to tech

names than 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 put up or shut up, where they agree over the stock but duke it out over derivative strategies. the judge herself steps into the ring, stacey versus mike. we know dan can't possibly lose or maybe he can find way. you're at the beach there. jcpenney's released sales figures. mike and stacey are mutual to bearish on the stock and most agree the future is bleak for jcp and the stock has had gains and a 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 graph 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 occasionally 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. i'm going to buy the downside october 29 put that will cost me about 50 cents. and i'm going to sell the 33 calls in the same month to finance that, also 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.

stacey, judge, you're looking for more aggressive protection with your trade. what is it? >> the company just reported earnings. my concern is more to the down side. mike and i are perfectly inline with our thesis. we really want to protect a long shareholder here. i want to get a bit more aggressive. 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 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 stacey'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. stacey 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's 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 optionsaction@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. time for pump up the volume, the names heating up options traders sizzle index this week. this biotech stock is best known

for an experimental drug developing with glaxosmithkline to treat lupus. call options got a shot in the arm. who is it? the anser when "options action" returns. a a a a a a a a a a a a

mike and stacey duked it out over jcpenney 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 dell 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 want to buy a strangle in 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 dan's 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, it 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.

now we know what dan did and what he's doing right now. mike, what did you do? >> my trade was simpler at the outset and the answer is simpler, i'm going to sell the call and collect my earnings. >> 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.

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. >> it looks like our time has expired. for more go to our website, optionsaction@cnbc.com. i'm melissa lee. see you again next week.