welcome to "options actions." your front row seat to smart money. i'm melissa lee. marcus' moment of truth. earnings season arrives next week, but we'll tell you which stocks the options market is betting on tonight. cost-cutting, cost co is oat out with earnings on wednesday, but dan has a strategy that could make you money if the stock goes up or down.

we'll tell you what it is. and kangaroo court. stacey steps down from the bench into the ring. and the options world will never be the same. "options action" begins now. welcome to the show. great to have you with us. here on the december act at the home of the world's third largest market site in new york city and across the nation in the windy city of chicago and the city of brotherly love, philadelphia. the bearish bets last week paying off prk the stocks with the worst week since june. with earnings weekend set to begin next week, is there more pain to come? let's get in the money right now. we saw volatility spiking. s&p 500 losing 5% on lose dieconomic news. sound familiar? maybe it's because we've seen it before. we've seen it back in july. weak economic news dragged the

s&p 500 down 7%. volatility spiked as investors bought protection and then boom the rally was, of course, i don't know. is it going to play out the same way? >> i don't think it's going to play out the same way, but there's a good reason we might see this kind of market action. the only window into what earnings might look like, the economic data looks almost identical to the way it looked the first week of july. if you take a look at the unemployment numbers, they disappointed by an almost comparable amount. it's really the same story playing out again. this time, what are the expectations coming out of earnings? i have a feeling it's going to be a lot tougher for stocks to rally. >> we did have that selloff in early july and then we boom out of it, okay? but here we are, we're about 10% higher than where we were last time. we've come off about 5%. we did have a lot of bad data.

companies clipped probably a lot of that low-hanging fruit that helped them give slightly better guidance for the second half of the year. i think a lot of that good news is probably in stocks at this point. >> and scott, you're also seeing caution? there's more put buying on the etf side? >> that's right. if you thought this earning cycle would play out the same as the last earning cycle, you would take advantage of elevated volatility, but we don't see that. that tems us that the option market is saying it's not going to play out the same way. plus as dan said, the story where the companies miss on the top line, beat on the bottom line, that's not going to work this time because that's just going to be seen as disappointing. >> i think you have to consider from a economic standpoint, we're seeing the put buyers. all of that is similar. few things that are different, we're just not moving as much as

we were. since this rally started in mid july, looking at the s&p 500 intraday moves, we have seven that have been more than 2%. you look at that three months heading into last earnings quarter and 7 was a drop in the bucket. it was absolutely nothing. you look at those average moves, that month heading into earnings last quarter. last quarter was 1.5 times greater than the average move going into this quarter. the market is able to absorb some of this data a bit better. top line key, bomb line, you can only beat on the bottom line so many quarters in a row. something else dan has brought up in the past that's important, different with the protection we're seeing is we're seeing buy oefrs january protection. so it's not just earnings. it's year-end. people have that in the back of their mind. >> i would add one really quick point. listen, the biggest difference is where we are on the calendar. we're close to fiscal-year end for mutual funds a lot of hedge funds. they have a little greater risk

tolerance because they are higher. let's keep this thing up. >> they're not going to finish the year with a portfolio that has nothing but cash in it. >> absolutely. most traders, most investors focus in on alcoa, the first dow component to report its earnings report. >> one of the things is i'm not making a play into the earnings per say, just this is one of those i'm going to take it into the end of the year kind of trade. the other thing i would say, generally speaking, i'm not the kind of guy who likes to spend a lot of premium. i'm trying to improve my odds and that's not how i'm going to do it. i'm going to sell a january 12.5 put spread for 1.35. i'm going to buy the 10 puts for 45 cents as a little insurance. the key story is deutch bank, goldman, both upgrading the stock to $17 and $16 price targets respectively.

overhang on the stock here, weakening u.s. dollar, they have to buy a lot of raw materials and other currencies. i think it keeps it a little range bound. with a bullish tenor i'm looking to take advantage of range-bound pieces. >> walk us through the trade? >> i'm going to sell the january 12.5 for 1.35, buying for 35 cents. my down side break even is 11.67. i'm effectively going to get long there. if the stock goes up, the most i can collect is the 90 cents that i sold the trade for. >> do you like this best, a range-bound stock with a bullish bias? >> i would say for mike this is actually one of the more conservative trades i've heard him throw out here. i do like the trade. do i love it? no. but i think it's a nice conservative trade. if you're more bullish, there

are much better trades. if you're neutral, if you find a level where you would buy it, it works. >> time now to make the call where the traders give you their best strategies for next week. retailer costco set to report earnings next week. but dan thinks option s inexpensive. the yellow line is the stock and the white line is implied volatility. you have a strategy that traditionally has a lore rate of success. but you think it's going to work with time? >> traditionally. one of the things, there's a line that's not showing there, and that's the realized volatility over the last 30 days. that's where the implied is, about 30. the options market, you know, it's not pricing a whole heck of a lot. about a 3.5% move for earnings. that's probably about where the stock usually moves to.

one reason i like the vil tillty, buying the move is it's priced a little chaeb. they reported august same store sales. the stock had a 10% rally and put it up on the year finally. the stock has finally continued to go. one thing i think is interesting with the earnings report is the company has an opportunity to show those positive trends in august transferred into september and actually have the ability to beat that number. or if they disappoint or give forward good answer that's disappointing it has the potential to go down. i want to buy the october strangle for $2. i'm buying the october 55 put for 90 cents and i'm buying the october 57.5 call for $1.10. what do i do to make money in this trade? i need the stock to be below 53 on october expiration, or i need it to be above 59.5, which is up about 5%. one of the reasons why i like

this trade here is because the street has gotten really bullish on the name. investors have gotten bullish. you see the price action on the stock. upgrades by analysts the last two weeks alone. i think there's potential to move one way or the other. >> do you ever see a play where you don't want to buy options? the odds aren't generally in your favor. i mean, waiting for a 6% move in a relatively short period of time is a challenge. it's a big one to overcome every single time you try to make a play like this. the only thing that's moving in your favor is the market has started moving around a little bit more here. >> i look at that event. i think the market, you know, to sta stacy's point earlier has gotten a bit more volatile. >> the problem here is you have to be einstein smart to make long strangles pay off. and while -- i think we figured out when you two butted heads before, it's better to go ahead and pick a position, i have a better idea -- >> we will bring that idea.

i'm glad you mentioned that better idea in our web extra. you can catch that right after the show. as any dick wolfe fan knows, that's the theme song to "law and order." are we trying to show off our nbc properties here to our potential friends at comcast? not at all. this music means one thing. it's time for america's favorite segment, it is time for "put up or shut up." where traders agree on the direction of a stock but duke it out over strategy. tonight we've got a lit btle bi of a twist. the judge, stacey is stepping down from the bench to step in the ring with dan and take him on over mosaic. hence the law and order music. these two agree on very little but there's some similarities. both fired off some nasty

e-mails haunting each other for who's going to take home this win. stacy, ladies first, go ahead. '. >> a couple things i would lay out here. earnings are coming up. i expect it to be a clearly neutral nonevent. the market is pricing in an actual event to earnings. that being said, i think the down side is less scary than the upside. i'm looking to do the october condor. i'm looking to sell the october 45 put at $1.55. i want to protect myself in case i'm wrong that that down side can be greater and i'm going to buy the october put for 40 cents, selling that put spread at $1.15. i'm going to sell an upside call. because of the stock's pullback and takeover rumors circulated beforecause i'm not entirely sure of the likelihood of those,

although i do put it at a low probability, particularly by october, i'm going to sell a call spread a little higher up, the 50 strike call selling at 80 cent and turning around and buying protection on the upside, buying the 55 call for a quarter, collecting 55 cents for that call spread. >> now you know how it feels to be up against the clock. >> he's going to do an easy trade here. >> this is easy pickings without you being the judge. >> you still have to have a good trade before it's easy pickings. >> i'm not einstein, but one i think i'm not doing, monsano, potash is down in sympathy in the last couple of weeks. i do think some of the down side risk is mitigated. i want to focus on the ceo out there making comments to yups in canada saying they look

attractive as a takeover. one of the things i want to do is put a simple takeout trade on. i want to buy a december call spread. i want to buy the december 55, 60 call spread. i want to sell that debt 60 call for 85 cents, paying 90 cents for that whole structure. if there's a deal and the stock is above 60 on deck exper ration, you're going to make $4.10. it's a pretty nice payout scenario over the next few months. >> ding, ding, ding. all right, judge, stacy's condor versus dan's call spread. what say you? >> okay, well, interesting things i would like to make a comment about. if you're going to sell options i like that. the only thing i was thinking that i might change about it is the down side 40 strike. everybody seems to think the real down side risk might be mitigated. on your side, making a

directional bet, buying options, and especially for a takeout, if i was trying to make a big takeout play, i would be probably buying that out of the money call just by itself and letting it go. i actually have to call this one a draw. >> oh, a draw. that's a twist. okay, scott. maybe you're the tiebreaker. >> i like the fact that stacy pointed out, most of the news is already out. she's selling options so i think she's getting a whoet lot more than she's paying for. >> thank you, scott. one of the things i want to throw out there just to be very fair. i think it's greater than a 65% possibility that we stay in the range. dan is really around an 18% probability that the stock could be taken out and above 60. those are your probables. whatever probability makes the most sense is ultimately the trade that should win here. >> disagree with this verdict. got a question about options, send some e-mail.

up next, how would you like to get paid on your limit orders even if they don't get filled? mike has an options strategy that will do just that. . time for "pump up the volume." the names heating up the options traders sizzle index. not as well known as microsoft and oracle, this small but mighty competitor is the biggest seller of the linux operating system. added to the s&p 500 just three months ago, last thursday it was the index's biggest gainer. and this week the options market was seeing more green in this red name. who is it? !d!d!d!d!d!d!d!d!d!d!e

where were options traders pumping up the volume this week? red hat, at one time up 20% its average volume. we check the sizzle index. and stacy, you did flag redhat calls today. >> every time there's a tech merger, redhat's name is thrown out there. it's always been out there. september and october 30 calls, no follow through today. that's disappointing. >> okay, so ignore it. tile now for a new segment on "options actions." it's time to "buy right" where we look at successful overriding

strategie strategies. selling calls against a stock you observe can be an excellent strategy for enhancing returns. >> anyone can simply buy a stock, but to put the odds in your favor, you need to know how to buy right. scott did that by selling a covered call on an oil service stock. >> i would sell the october 40 call. you would collect $1.50. >> hang on, mike. let's break that down. when investors sell covered calls, they're making a bullish to neutral bet. by selling an out of the money call against the stock they own. the upside, sells of the call generate extra income. the down side? your gains are capped to the strike of the call that you sold. plus the money you received selling the call. so let's take a look at how mike's trade went down. he bought shares of national oil well, but he wanted to increase his return. so he sold the nov october 40

strike call and collected $1.50. but if mike thought shares were headed higher, why did he cap his gains for just $1.50? because by selling that call, mike can now make money if his stock goes up, does nothing or even trades down. too good to be true? let's take a closer look. when mike put on his cade, national oilwell varco was trading for $33.95. scenario one, national d'arco declined. or the price of the stock minus for selling that call. anything below that level though and mike will lose money. give yourself an additional

$1.50 downside protection. >> mike makes money off the shares he owns up until $40. at that point, his stock gets called away and mark waves good-bye to his shares. with that $1.50, his real return $4.50. anything above that level and mike's profits are capped. since the time of the trade, shares of national oilwell varco have stopped. >> i like that trade. >> buy back that $40 strike call and try to play stock for both gains. they all want to know the same thing. what will mike do now? >> here is an example why these

strategies worked. had mike bought that stock, he would have made about 9% on the trade. by selling that call, mike was able to realize an extra 2%. if you do that every month, you would be a happy person. we showed mike in the package, with shares of national oilwell varco, you do have a choice to make. >> you have to ask yourself a question if you are in this trade. the first thing you want to do is make sure you're comfortable with the thesis you want to continue to be long with the stock. if you want to be long with the stock, you don't want the stock called away from you. come expiration week, as the option begins to decay, you're going to look to cover it. you're going to want to buy that $40 call back. if you want to put on what's

been a successful trade, sell another call against it and try to enhance your returns. what call are you going to sell? about 5% out of the money. if the stock's here, that would be the $42 call. >> that was a great call to get in there. one of the things when you look to overwrite, you have to be tactical about it. you don't want to override a stock that could be taken out. you've got to be disciplined you don't sell stocks and short long. >> that's exactly right. every time expiration comes up, decide what you want to do. >> got a question, send us an e-mail. i do read each e-mail. go to optionaction.cnbc.com.

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last word from objection pits. >> consider mike's strategy. >> most of the news is already out. >> i'll go with stacey's call on mosaic judgment. >> see you back here next week. >> see you back here next week. >> see you back here next week. >> see you back here next week.