it is friday night and all the action you need is right here at the nasdaq market site. i'm melissa lee. these are the traders. welcome to the show. very nice to see you. tonight, the first show of the new year and we kick it off with an earnings bang. your plan to make money on jpmorgan earnings turning time into money. dan will do just that with intel earnings. and then apple trade, you can make money if the stock goes up,

down or sideways. seems like we've flip-flopped. first of all, happy new year to you all. we haven't had the show in quite some time. so it is nice to see you. >> happy new year. >> and it is of course nice to see you out there. dan, what do you make of this rotation? >> the rotation was interesting. you just brought it up. last year technology really drove a lot of the gains. obviously financials acted pretty well off the lows, but technology was the relative leader in a lot of ways. so this week we start off and i see a lot of names in the banking stocks. citi's up 8%, wells fargo up 7%, bank of america up 11%, but yet google, rimm both down. but that said, there's a little bit of a rotation in the first five days of the year. >> i don't even know whether it's a whole week because that trend which existed for the first four days of this week didn't exist on the fifth which was today. today we saw -- we did see

technology outperformed financials. they keep saying as goes january, so goes the year. but as goes the first four out of five trading days, so goes the year? i don't know that that works necessarily. >> but today much like part of december for financials. it's a good thing that not every financial name has participated in the rally. citigroup is still trying to get out of its own way, but jpmorgan and morgan stanley and goldman sachs are all up significantly just in the past month, 5% to 10% for all of those names. >> the overall market did quite nicely in the first five trading sessions and at the same time we've seen volatility being sucked out of the market. 19 month lows intraday friday session. what do we make out of this? >> i think that there were a lot of players, a lot of option players that left last year very early. they went home, they said we've made some money, we're afraid of big losses, so there were

players who were not participating that might have. now, big name players, institutional players, tend to be sellers of volatility. now they're back to the game and that's what's going on. >> and another big point. next friday is expiration. so if you own january options coming in to the year, there were very few events in this option cycle in january as we really only have five big names reporting before expiration. >> do we make anything out of the fact that it's been slightly elevated to the vix? >> one of the things that happens is the representation of what we see is the price of options will decline. so if you see technology underperform in the early part of the week, you're probably going to see that volatility will seem relatively elevated. i think that has more to do with just basically the way the market has performed.

>> and there were question marks for tech. >> i think tech right now will be bought again. it's just in a little consolidation phase. >> there's one other really important thing where earnings season, if anything will happen, it usually happens in the first couple weeks of the earnings season. at that point if we're going to see volatility come in, i'd expect it week three. >> let's delve deeper into jpmorgan. what is your strategy going into earnings? >> typically in any kind of these catalyst situations, i think most people who have seen me talk about these things in the past knows that i'm not options ahead(páalysts. when i last looked at it today, the implied list was not that high. not expecting a whole heck of a lot. again taking a view that not a

whole lot will come out of this so what i'm looking to do is the march 48 risk reversal, looking to sell the march 42 put for about 85 cents. collecting 35 cents. if nothing happens, i'll collect a little bit of money. if we see the market and financials go up, i'm likely to benefit. >> let's break the trade down because what's interesting about jp morgan is that expiration falls on the day that jpmorgan reports. >> they'll report that next friday morning. one interesting thing is it does make options a very pure play. the thing is i would probably be a little bit hesitant necessarily to try to do that because you're going to have very short amount of time to make the decision. >> and that's why i guess you picked march. i like risk reversals. i think you have to have a view here and i don't think they get that much easier in the near term until we get some of that data next week.

maybe wait to hear what they have to say. >> i love risk reversals and we talked about how these stocks have run a little bit. this was a good way to get longish without jumping in and buying a bunch of stock. >> to walk through the rest of the trade, why did you choose the puts and calls? >> i meant february, but anybody probably figured that out pretty quickly. the reason i choose the 42 strike, i'd be getting long around the 4165 level. that's down 6%. i don't think that's a big risk. the biggest move that this stock has made off of an earnings announcement recently was a sharp upward move. and also, of course, because i'm not expecting a whole lot, i wanted to make sure that whatever strikes i did choose, i was going to get a little bit of credit to put it on. >> let's move on and talk about another stock reporting earnings. jpmorgan certainly not the only

earnings name. intel is also out with earnings. let's head to the charts and get our technical setup. carter, always nice to see you. what are you seeing in terms of the conviction in the semiconductors? >> the group has been on fire. here are the last six quarters. basically this is the stock action meaning how it actually performed from two days before to one day after the earnings release and it's almost 50/50. in the last four to six, up. and frankly not a lot of beta here. so let's look at the chart. a low in march of 12, touches 21 in october and has been stuck here for four months. so the relative strength is poor, it's underperforming other semis.

the presumption is it will get it out of here. we think that's an event in the next two months, three months. >> do the fundamentals match the bullish technical picture? >> they do match. he makes that little triangle there. it's going one way or another. and my sense is if we are in the economic recovery and we do see some of these trends like the pc cycle, this stock could break out. that said, it could definitely consolidate here. they probably had a very good quarter. the guidance in q1 not going to be off the charts and i think people who own this stock understand that. so a strategy that i'm looking at is possibly a january, february 21 call calendar. so what i want to do is just make a bet that like carter just

said, the stock will be range bound and it closes between now and earnings next thursday and then expiration on friday, the stock closes below $21. so i want to sell the january 21 call for 35 cents and i want to use the proceeds and buy the february 21 call for 60 cents. so that structure costs me 25 cents. and the bet i'm making is that the stock will be below $21 and then i own that february 21 call for basically 25 cents. >> so you start profiting when, below 21? >> yes. basically i'm using this as a directional bet. i want to own that call in february because i think you could pop out of that range that carter just showed us. >> you call it a directional bet, but the best part is you're taking advantage of volatility. and we've talked about how quickly volatility comes out of option prices, that is option

prices come down right after earnings. it's just incredible how quickly that happens. if there's a trade that i like better than risk reversal, it is probably calendars. i love calendars because you're selling something that will disappear really quickly and you're protected by owning that longer dated option. >> i like this trade. one of the things is if you look at intel's implied move going into this earnings, it's implying a move over 8%. the likelihood of that is probably pretty low. it hasn't made a move bigger than that in the last -- once out of the last eight. the other thing, next week january options are off the table, but the thing is if the stock does rally, what you own is a down side strike if it goes through 21. so one of the things is that the extrinsic value will hold up a lot better. it's a great trade.

>> so take it to the bank. >> all right. carter, always a pleasure. thanks so much. coming up, think the apple tablet is all hype? you could be on to something. dan has been on this name in the past. he has a bearish trade that could make you money even if the stock goes up, down or side ways. but first what was the name option traders saw as a takeout candidate this week? here's a hint. time for pump up the volume, the names heating up options traders sizzle index this week. this hot rolled heavy weight has been building bars and beams since 1993, but the stock put the pedal to the medal this week stoked by takeover speculation and the options picks were among the first to predict that a cold hard competitor might make a play. who is it? the answer when "options action" returns.

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would be steel dynamics. we called both companies. both had no comment. but in addition, saw a lot of activity. >> it was a really interesting week. first of all, there was some upgrades that took place. we did see a lot of call activity on thursday in steel dynamics. stocks up almost 11% this week. we also saw a lot of activity today in ak steel. that stock up 17%. and what was interesting there, unlike steel dynamics where we just saw upside call buying, in the ak steels case what we saw were people buying the march 28 calls and selling the january 11 calls. when you're seeing deal chatter, one of the things you look for are people buying the lower strike, selling the upper strike.

those are usually the attractive trades in deal situations. so there probably is a lot of speculation in the name, but is it steel dynamics or ak steel? >> let's get to the moment that you all have been waiting for. the much anticipated apple tablet moves closer to its debut. shorting the stock could be suicide, but how about a bearish bet where the biggest risk is owning apple at a discount. too good to be true? take a look. it is coming. the final word in innovation. the tablet. apple's latest and greatest product that could not only revolutionize computing but possibly make you rich, stop smoking, lose weight and maybe even get a date with this girl. but wait. innovation doesn't always mean a higher stock price.

especially when that's what everyone is expecting. >> i think the stocks will continue to go up into the event, but after the event, i wouldn't be surprised to see a pull back just given it's a buy in the rule or sell in the news type of a story. >> let's say he's right. you could short apple stock, but that could mean unlimited losses. how about a bearish bet that is no riskier than buying the stock? enter options. or specifically the one by two put spread. here's how it works. you think apple's going lower, so you buy a put. but that's expensive. and to make money, you need apple stock to fall by more than the cost of that put by expiration. so to increase your odds of success, you would sell not one, but two. now making money is easier. because you've lowered the cost of your trade, you only need

apple stock to fall a little to make a lot. in fact, you can make money all the way down to the lower strike. that's where your profits are capped. but nothing's free. so what's the tradeoff? well, you sold two puts and only bought one. so that means that should apple fall below the strike price of the put you sold, you'll be forced to buy the stock at that lower level. now those profits you made from buying the put act as a buffer, but remember, below that cushion, you will see losses. so let's recap. the one by two put spread allows you to make a bearish bet that is no riskier than buying apple stock at a steep discount. wow. maybe they should make that into an app. so before you get started, what do you need to know? before we get to dan's trade, let's break out that playbook. dan, let's start off with the strikes. how do you choose them?

>> the strikes goes back to some of the things we talk about. you want to look at certain technical levels, you want to look at valuation levels and you want to pick areas where you have the potential to get long. and that's really important. >> in terms of cost? >> particularly the cost of the two puts that you sell because it's very easy to sit there and say i want to pick a really low strike option because that's where i'm comfortable getting long. but at a certain point, it really doesn't make that much sense to sell those puts. if you've got a put that's a nickel bid, do you really want to go ahead and sell them just because that's where you'd be comfortable getting long the stock? be careful you don't choose too cheap. >> and you have to be careful about the cash you'll be tying up in your account because all of this requires margin. >> you may end up collecting a little premium, but this will eat up margin. we talk about the worst thing that can possibly happen is that you end up buying a stock that you want to own anyway and you get to buy it at a discount, but remember, if you falter that lower put, you do have to buy it. so you'll have to leave some

cash in your account, you'll have to eat up some margin, that's just the way this works because you may end up buying the stock. >> let's get to apple itself. long term you're bullish, but short term you see stumbles. >> best stock ever. the company is firing on all cylinders. they probably had their best quarter ever in q4. it's going to be a very good quarter when they report on january 25th. and they'll give probably pretty good guidance with that usual bit of caution that we come to expect. the factor here that's really changing the whole thing for me is the hype surrounding this potential tablet device. i'm going to go buy one. but this isn't going to be a big, big deal for 2010. it's really not something why you should get all geeked up to buy the stock right here for 2010. this is a 2011 story. and this company has had miscues on product announcements. apple tv and the mac book, there

was a lot of hype. so that said, i'm not telling you to sell this stock. that said, could the stock pull back after these events? no doubt about it. so we talked about the one by two put spread. what i'm suggesting is the february 200, 190, one by two put spread. i'm selling two february 1.90 puts for a total of 5.65. i'm taking in a credit for this structure. i'm not paying anything for it. so we have these events coming up here and so the question is -- >> how do you make money. >> -- how do you make money. here's the thing. a whole heck of a lot of different ways. if the stock goes up, you take in that 30 cent credit, no harm, no foul. if the stock goes down between 200 and 190, you could make $10.30. between 190 and 180, that payoff trails off, but you still make money.

and worst case scenario is you get long at 180 down 15%. >> you get long at a discount, the stock that you think is the best stock in -- how can there be a down side to this? >> this is not for my fancy option trading fans on the desk here or you. this is a trade that there's a lot of ways you can win and there's very few ways you can lose. >> great company, great trade, but this tablet may end up being like the smurfs in that we don't know if they really exist. so this makes a lot of sense because the tablet may be a little overhyped. >> one of the quick things you were talking about, another big release, not an apple release, one stumbling block wasn't even this, it was probably the google phone. and i don't think that obviously proved to be the case. i think this is a great trade. i like the fact that you could potentially get long. i'm going to go with dan.

>> got a question? send us an e-mail, we will answer it during our options action 101 web extra plus. we have an update on mike's citigroup trade that is working out and buy right strategy on microsoft. so go to our website and that is right after the show. aders at te are a demanding bunch. in fact, they want it all. you know, when i place an order, don't just fill it. get me the best available price. a better price means more money in my pocket. that's why td ameritrade's proprietary order routing technology consistently seeks the best available price. i've got quotes, charts, watch lists. just the way i want them. mission control? right here.

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final call in just a moment, but first breaking news. too newly listed options hitting the market this week. stacey gave birth to jackson and sierra weighing in at a respective 7 pounds 13 ounces and 7 pounds 5 ounces. that's a whole lot of baby. 15 pounds worth. mom and dad are doing well and of course we wish the gilbert family all the best. now, to the final trade. scott. >> earnings coming out starting this week, make sure you know what you have on. >> dan. >> intel, look at call calendars.

>> i'd almost have to flip a coin between dan's trades but i'll have to go with apple one by two. >> looks like our time has expired. for more "options action," go to optionsaction.cnbc.com. thanks so much for watching. we'll see you back here next friday night. ever want to look over the shoulder of a seasoned stock trader? well, here's your chance... i'm running strategy desk from td ameritrade to set up a trading strategy based on how i think the market's trending-- right now i'm looking at a 20-80 stochastic cross. now, i could be running multiple strategies... my own tweak or some combination-- but for now--this is good...

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