welcome to "options action." i'm melissa lee. here's where the action is tonight. more room to run. why some options traders are seeing dow 10,000 by next month. in the black, blackberry maker r.i.m. with earnings down next thursday. solar animae heating up. these are the options actions trader at the desk.

we're at the nasdaq market site in times square. the market is open, it must go up. that seemingly is the new rule as stocks post their eighth winning week in the last ten on a very busy expiration friday. is this the birth of a new bull market? let's get into the money right now. it's general electric. six months ago, the face of fear. now the poster child for an historic stock rally, turning positive on the year. dow component caterpillar and finally projector and gamble beginning to break out as well. mike, you have been the voice of skepticism, of cautious throughout this. are you convinced? >> one of the things we're seeing is cautious optimism. how about that. buying down side protection, one of the things that highlighted this week.

one of the things that did well, someone bought a one by two put spread financed by selling calls. this is someone who wants to stay long calls but don't know how far it can skrech. how far it can stretch. also in the vix some of the activities is it's probably going to drift a little bit. if we did see anybody making a play, it probably will stay here but they were financing upside buys in that area. also general electric, if they were buying any protection, it was also in the form of one by twos and down side put spreads in december. >> mike, you just said it. it might go higher. no one wants to sell anything right now because everything might go higher. the truth is the longer we stay up here, the more likely we are to close higher at the end of the year. people do not want to cap their upside. you know, they're willing to kind of buy cheaper protection

with one by two down side put spreads in a situation which ain't going to happen this year. it is inexpensive to put on some defensive positions at this point. >> that's right. there's another one by two in caterpillar earlier in the week that we saw. it has been episodic. some of these names have done really well. some of them that we have said have to participate are still languishing. and the poster child for that would probably be walmart. it would really be great if we could see all of these names that need to do well do well. but that's just not happening. we did see some interest in p&g today. a lot of people bought their sep 57.50 calls back in they didn't want to get called away despite the fact they said if i get called away, that's a great thing. but now they want to stay long the stocks so they came in and bought those calls back today.

>> you're watching the industrials and the volatility move. what did you notice? >> we talked about the industrial space several times. i'm most certainly in error here of recommending several overwrites in this space because i thought the volatility looked high. the stock may get called away here, but one thing, those implied volatilities, either the richness of the options have come in a bit. so on a relative basis, the industrial sector doesn't look as rich as it did compared to other sectors. another point i throw out there, correlations, meaning how the stocks are moving together, including the industrial sector, that's dropping. meaning stock-specific stories are becoming more and more important. this goes to that point that scott mentioned there as well. people are selling options. you didn't do that when you thought an entire sector was going to collapse, but you can more do that when you know where

you want to enter, a level. there are suggestions people would willing to buy at a certain level, honeywell. there were definitely other sectors i would throw out there. technology continues to be welled by. people are interested in the name and also financials. >> one of the reasons we should be looking at on a stock specific basis is because a lot of these names we really saw revenues and earnings just plummet off a cliff when everything turned south. an exception would be companies like apple. these are things trading at good multiples and have a lot of optimism priced in. i wouldn't necessarily say everything you said is wrong. some of the purchases might still be in order, a name that dan really loves. >> stacy, let's talk about general electric. general electric, we talked about in the past, it's a stock that i own in multiple accounts. i like the story here. if you look at the -- if you look at the industrial side, the

nbc universal side, you go to the risks here. even if i don't own the stock and i'm looking for a position or a place to enter by owning ge, one of the trades i like is looking out towards december, buying the 15 strike puts which were offered around 75 cents. i am cheap, i've said it before, frugal person on the network. i don't like to spend any money. what am i going to do? i'm going to finance it. i sell the 14 strike put, collecting 50 cents for that sale. i'm not collecting enough to cover any purchase so i'm going to sell the 13-strike put and collect 30 cents for that. net i'm going to collect a nickel to buy protection. so let's think about this trade a little bit. if i own the shares, i've got my protection and i'm getting paid to own the protection. i don't own the shares. i still get paid if ge continues to go higher. on the down side, if the stock gets to around the 14 level. i'm going to make about $1.

i don't get long until it's around $12, which i think is an attractive level. >> you and stacy have a habit of banding together when it comes to trade style. >> what everybody saw is this thing going to zero potentially was an issue of risk associated with the financial marks. i think we can safely say that's off the table. the other thing is, collecting premium. when you do options trades, one of the things you want to do is make sure you're not spending premium all the time. i like it for those those reasons. and finally, the interesting thing is when you sell more options than you buy, you're saying, okay, i'm going to be willing to get long at a level.

she's using one strike to help finance the purchase of this put. the other thing is on a lower strike, she's saying i'm willing to buy it just a little bit lower than that. that's really thinking creatively. >> all right, time to make the call where you get your best strategy for next week. r.i.m. reports on thursday. since it last reported, shares of the company have not only trailed rival apple, but the broader nasdaq as well. listen up. if you ever thought of buying r.i.m.'s stock, stan has a strategy with a similar risk profile but a much, much greater upside. >> one of the things i would say, if you haven't been long r.i.m. and you like this story for some reason, maybe you thought the underperformance had to do with apple's launch of the 3gs phone in the quarter or palm pre's launch in the quarter. and so now you're in a situation where the company r.i.m. is going into a seasonally stronger

period as they head into their november quarter. one of the things i would like to do here, the valuation is trading about 20 times next year's earnings. it's supposed to grow about 20 times. we know these guys are very well exposed to the enterprise. banks are using all your taxpayer money to re-hire people. they arm them with blackberries. they sell a lot of consumer phones. really fill in that gap between the performance of let's say apple and the nasdaq. here's a trade structure that can actually help you get long at two different levels. one level lower and one level higher. what i'm suggesting is the december 70 100 risk reversal. what am i doing here? i'm selling the december 70 call for $3.10 and i am buying the december 100 call for $3.10.

that structure cost me nothing. if the stock is up about 19 cents at $100 or higher on december expiration, you get long. on the down side, conversely, if the stock is below $70 at december expiration, down about 16% from here, you also get long. so one of the things in between those bands, you really don't lose money on expiration. >> one of the things that's great about a strategy like this, you have to think tactically. between now and expiration happen it does not need to go through the 100 strike. if the stock drifts in, if you're still comfortable being long at 70 where he sold that put, you can then take advantage of it and let the thing ride. if the stock rallies and you change your thesis, you have an opportunity to take this thing off for a profit then. don't be afraid to manipulate your trading activity between now and expiration if it's working your way.

>> r.i.m. earnings out on thursday. oh, the music playing and that can mean only one thing. the fate of this market is in the hands of the banks. that's right. it's all about the benjamins. we're in serious need of updating our iphones or we're about to have a substantive conversation using derivatives. it's time for "put up or shut up" where mike and dan agree on the direction of stock but duke it out over the proper strategy. tonight, we talk financial which continue to make new highs. now, both are bearish on the xlf, the etf that attracts the financials. despite the fact that half report earnings in the next couple of weeks. both feel a pullback is just around the corner. let's talk about options. >> one of the things i would say is a bunch of these guys, 50% of the weighting is likely to report. goldman, morgan, jpmorgan, likely to report before october expiration.

if you own some of these banks in your portfolio, you may want to get some protection that doesn't correlate directly with the single stock. you're not collaring those things or buying puts, you may want to look at the xlf, the etf on the banks. i was looking at the october 15-14 put spread. i'm paying 50 cents for the october 15 strike put and i'll sell the october strike put for 20 cents. that structure costs me 30 cents. my break even is down 3% at 14.70. my max gain is 70 cents, more than two times your money at 14 or below. how do i lose money on the trade? really if the etf is above $15 on expiration you lose your money. >> similar strategy, mike. but a different time frame. >> one thing you want to look at, make sure you give yourself enough time to make it work. another thing with an index, you have less risk this thing is going to go straight to zero.

it can be a remarkable decline, but that's less of a concern. i'm looking at the 15 by 13 one by two put spreads. i'm going to achieve the most profit if it gets to the 13. i don't get long to about 11.30. that's when i start losing money. >> hang on, the judge can hold me in contempt. these are two wildly different strategies. dan is very meat and potatoes. mike is a one by two. more fancy schmancy french food. >> you also get the ding-ding, scott. you're pulling a kanye here, scott. >> i know dan was hoping i wouldn't come back from vacation, but guess what? i'm back. i think scott's point absolutely valid. i love both of these trades for very different investors.

i think dan's trade -- you're implying a 30% probability below 14. if you like that kind of payoff, i like dan's. you know your risk and your reward. mike is definitely a bit more complicated. but i do like the longer tape there. >> what's the bottom line, judge? >> it's a draw. i like them both but they're very different. >> it's like kissing my sister, stacy. go back on vacation. >> options action@cnbc.com. coming up next, losing never feels good, but by using the right options strategy, you can actually limit your losses. we'll show you how to do that using best buy next. time for "pump up the volume." originally called the monsanto electronic materials company when it was spun off in 1959, this semiconductor maker has gone back to its green roots, selling over $1 billion in solar wafers in 2008.

but it was the call activity that was really heating up this week as the stock surged 8%. who is it? the answer when "options action returns."

you lose less when your trades don't work out. unfortunately, that's what happened with dan and mike on best buy. on options action, the only thing worse than losing is losing twice. last week, dan and mike did just that. making bearish bets on best buy. but that's where the similarities end. in dan's case, he didn't want to spend too much on his trade. >> options prices are bid up little bit here. so i don't want to outright buy options. >> so instead he bought a one by two put spread.

>> i want to look at the september 37-35 one by two put spread. >> hold on, what does that mean? it means dan bought one put and then to offset the cost sold not one but two lower-priced books at a lower strike. then to cut his costs, he sold two of the september 35 strike puts for 25 cents each. now his profits are limited to the difference between the 37.5 strike put that he bought and the two that he sold. but remember, dan thought best buy was headed lower, so why would he sell those two 35 strike puts, which is a bullish option strategy. while he thought best buy would fall, he didn't think the stock would go below that $35 level. so he cut his costs and still made a bearish bet. so let's do the math.

dan paid 75 cents and collected 50 cents for selling two. total cost of the trade, 25 cents. a full 2/3 cheaper than buying the put alone. but here's the catch. by selling the two puts and buying one, dan is effectively short that 35 strike put. and if the stock falls below that $35 level, he could end up buying that stock at $35 and be exposed to a maximum loss of $3,500.

>> willing to draw a line in the sand. stocks are not going down 17%. >> this strategy dan wants best buy stocks to trade just above $35. and so does mike. >> what i'm going to do is the same trade as he did and add something and buy the 32.5. >> just like dan, took one extra step. bought the september 30 32 strike put for ten cents increasing the cost of his strike 35 cents. trying to risk less to make more. buy the extra put by purchasing the lower strike put, mike protects himself if best buy stocks tumble below the $35 level. maximum loss is limited. cost of the trade is 35 cents. >> i still feel like i want to give myself a little bit more downside. >> turns out that extra put was not needed. that's because since the time of their trade best buy stock had hovered above $37. making both dan and mike losers. one stock, two strategies, and a shocking verdict. >> i like dan's one by two. >> left mike speechless and dan offering some pointed advice. >> vacation. >> openings action fans are calling for blood. >> with expirations come and gone, can dan and mike make it up to their biggest fans? >> all right.

relax yao. here is why these strategies work. bought the best buy. you would have lost $75. dan lost $25. it lost $35 if you held it to expiration. that's the big if here. you have to remember that you do not have to hold these trades, any of these trades to the expiration one of the things we talk about when making a play to the catalyst, this applies when you are trading short options, when the catalyst comes and goes you see what the price will be, don't be afraid to act. you had an opportunity at some point this week to sell the one by two compoent dan got for a 25, 35 cents. that would have gotten mike out for a small profit. long 32.5 put. that's definitely one of the things want to do. if you are going try to make a directional bet on a catalyst try to risk very little and give

yourself the potential for a lot of upside and that's the only way to do it. >> the other thing is have a clue what's going on. i mean, you know, stock was not really going that much lower when you put a low dollar value trade on it that would give you the opportunity to make good money without risking a heck of a lot and truthfully you could have sold that by two point spread and made money on it. >> now you know how dan feels about you. >> got a question. yao, if you are watching send us an e-mail. go on our website for exclusive trades and educational strategies that's right after the show.

time for the final call. >> i like the ge trade. i like that christmas tree. >> scott? >> i'm going to watch option volatility and volume in the industrial to see if we see more of the names like walmart showing a breakout. >> if you are inclined to get long, look to risk reversals. garbage guidance may not give you a lot of confidence long in the stock. you may want to create a

structure to the upside. >> against my book, i will hedge and buy that one by two excel left december put spread. >> looks like our time expired. thanks so much for watching and see you back here next friday.