this is "options action," your front row seat to the smart money. tonight, above the rim. how would you like to protect your profits in rim while still having up side for two bucks? dan nathan will show you how. plus, amber waves of pain? mike khouw tells you how you can triple your money off monsanto's lousy harvest. and buy write. a simple strategy that could make you money whether this component goes up, down, or sideways. scott nations with the industrial strength trade. "options action" begins now. and welcome to the show. i am melissa lee, and these are the "options action" traders. at the nasdaq marketsite, the world's third largest options exchange. stocks stuck in the mud, waiting for a catalyst. but options traders are placing

bets now on earnings. so let's get in the money. and you've got to forget about all those other headlines. greece, south korean ships sinking, blah, blah, blah. earnings are going to be the catalyst. >> things everybody's talking about every single day. and guess what, folks, all of that going on what's going on with stocks? not a whole heck of a lot. every single day we look at this and they are not really moving around that much. that's been going on for a solid month now. day in, day out moving basically less than half a percent. the options markets, though, if we look further out, are telling us that the day-to-day volatility, how much the market's going to move around is actually going to be higher in the future. what are we waiting for? i think we're waiting for earnings. we've got the end of the quarter. we just heard tim seymour talk about it on "fast." this is it, folks, now the earnings season's beginning -- >> listen, the focus is going to be on earnings, no doubt about it, we saw some out of oracle earlier in the week here, that was a little preview and it was fine. listen, the stock didn't do anything afterwards. it gave, you know, a good quarter and good guidance, and

there you go. we're at 52 -- multiyear highs here on a lot of stocks. and one of the bigger points i'll make is here's a better story. there's a big bifurcation going on right now between some big cap stocks. we were talking about it before the show. if you look at some of these big caps, hewlett-packard has outperformed ibm off the lows from february, almost double the performance. the same thing with amazon over google. the same thing with goldman almost over morgan stanley. that to me is kind of interesting as we head into earnings. >> i'll say a quick thing about this. these are the haves and have mores. every single one of those names is up more than the s&p so far this year up and more than their respective sectors. >> scott, if we know the catalyst is going to be earnings and mike said we think volatility's going to be higher, does that mean you should be long volatility going to earnings? what way have we seen on the vix in april, may, june? >> well, generally, the daily close for the vix historically is about 20. and in this month it's actually about 20. now, it starts to trail off a little bit as we get into the summer. in june it's actually about 18. it closed below 18 right now. so if you want to buy options to

protect yourself going into earnings, you can do that. now, volatility comes -- just gets crushed when it comes to earnings. it comes out of these options all at once. so i wouldn't suggest you buy outright options to protect yourself, but you can put on some of these spreads to protect yourself -- >> and listen, scott's conversation about the vix is a helpful one. for stock investors, you know, what does this mean? again, we talk about it a lot. on a relative basis, you know, it's probably cheaper, though, on certain instances even in those months that are pricing in an earnings move, you know, to play -- if you're looking to manage risk around positions, it's probably on a relative basis pretty cheap right now. >> yeah. the other thing is that we've been looking at stocks and they've basically been going in one direction. either they've been just going straight up for about a month or the ones that haven't been performing well have been weak, consistently for about the same amount of time. really the critical thing isn't so much whether you're going to buy options or sell them, it's getting the direction right first and foremost, and putting your options strategy around that. >> if you think they're cheap

now wait until the day after earnings come out, they're going to be incredibly cheap. >> they're on sale. >> because earnings for options traders it's the super bowl and world series and daytona 500 all rolled into one and options just get crushed afterwards because there's so much less risk. >> right. dan, we had showed the viewers at home a handy dandy full screen haves and have nots. does it make sense going into the have nots thinking there's more upside in these names? >> i'm not a believer in the dogs of the dow sort of thing. that is a useful graphic because it does show a little bit of underperformance. as we get into earnings season, here's a big name, one of the biggest names in the dow, one of the biggest names in the market, ibm, we just showed it, versus hewlett-packard. since the stock reported in january, its q4, the stock has been down a lot relative to the market and it's still basically lagging all of its peers. so one of the things i would think about as a trade, forget the haves and have nots. if you want to set up -- this chart is a really interesting chart. one of the issues is sales growth and they don't have it right now. if you want to buy this stock and you're worried about earnings that are going to come

out in a few weeks, one of the things you can do is a risk reversal. we talked about this last week. it's not for everybody. but if you're inclined to buy the stock here at about 129, think about this, the last two times they reported their earnings and giving guidance the stock spent the next few days selling off 7% the last two times. here's the trade. if you're inclined to buy the stock here think about risk reversals. they're not for everybody. i'm going to look out to may because that captures ibm's earnings. what do i want to do here? i want to sell the may 120 put and i want to sell that for a dollar. i'm going to use the proceeds to buy the may 135 call. now, that whole structure costs me 15 cents. let's figure it out. how do we do this? how do we make money? and how do we avoid getting blown up in this trade? okay? the worst case scenario is if the stock goes down, about 7%, down to 120, you get long down there. now, we just talked about this. you're only doing this trade if you're inclined to get long here. and the best case scenario is the stock gaps up to 135, up 4%, and keeps going and you get long up there. if the stock's in between there

mark to market you could lose money or you could be up money, but the worst case above 120 is you lose the 15 cents you paid for. >> there's a couple things you should like about this trade. the first thing is the market has obviously had a good strong rally here for about a month. obviously one of the things people might be taking a look at is did i have an opportunity, did i miss that opportunity. obviously the risk here is you're going to get long back at a level where in retrospect you wish you had bought the stock. that's an important point. the other thing is we're talking about haves and have nots, i want to emphasize this is one of the have stocks. i wouldn't emphasize go out and buy the stocks that are underperforming. this one isn't underperforming the whole market. it's outperforming -- it's underperforming -- >> but its closest peer is hewlett-packard. >> that's its single closest peer, but in the tech sector in general if you're looking at hardware it is outperforming -- >> it's not a hardware story. it's gotten hurt because of services. and that's the big point. >> there you go. >> and melissa makes a great point. i love giving melissa props. bring it back whenever you want. the point is, this company had a very easy comparison year over year in january, when they reported. they disappointed on the

services numbers. and investors, that's the story. that's why it's in the penalty box. >> you make a great point that ibm is no longer a hardware manufacturer. >> exactly. >> they sold off their laptop business and now they're largely a services business as opposed to hp which makes computers and printers and all that. let's get back to the trade. it's well known, i love risk reversals, and this is a perfect example. the stock only has to rally $5 for dan's risk reversal to start participating in the upside. on the other hand, the stock has to break $10 before i get the stock put to me. one thing, dan said the trade's going to cost 15 cents. that's true. that's money out of pocket. you have to leave some money in your account, though, for margin because if the stock does fall it's going to be put to you. you're going to have to end up buying it. >> that's a very good point here. let's move on to your next option. could monsanto's pain be your gain? the stock is down just about 15% so far this year. mike's got a strategy that could triple your money if it falls another 15% by may. but before we get to that, let's get the technical setup for you. time for a call to the charts

with our main man, our main chart man, carter worth of oppenheimer. carter, what are you looking at? >> sure. let's go. so i've got a couple graphics here, four in total. let's look at the first one and tell you what i'm seeing. two-year chart of monsanto. the things that jump out, well, let's go back -- i think we've jumped the gun here. two-year chart of monsanto. and the key to it is this. the stock market over the last year and a half is surging. monsanto not participating. that's very suspicious. the level 70, 70, 70. and now hovering at 70 the presumption is a bad break to the downside. the second graphic is a long-term chart. keep that range in your mind. so here is the important tell. a stock that prints 70 in '02, 145 in '07-'08, a major break in trend. that's the range we looked at in a prior chart. and again, this is a fairly important topping out formation. take the same 10-year chart, graphic 3, which is the stock itself with earnings, and this is the disconnect. this is the share price, up some

450%. this is the earnings, up 300%, plus or minus. and finally, this possibly is what brings it all to the downside. the last graphic, a quarterly miss. eight quarters they beat. last quarter missed consensus. this company reports early april. what would break the chart would be a miss. and i bet you that's what's coming. >> so carter, your suspicions are the stock would move to the downside? >> that's it. >> carter worth of oppenheimer, thank you very much for that technical analysis. now let's get the fundamental take on monsanto. mike, you're looking at this. >> this is a really big quarter for them. this is actually -- this part of the year is their biggest quarter, as a matter of fact, on a revenue basis when you think about their business, which is largely agricultural. that makes a lot of sense. here's another interesting point about this. the multiples on this stock have continued to decline over time. so basically, what people are willing to pay for the future of this company has been going down.

that actually poses a little bit of a risk here because if it started to revert back to previous multiples, even if they sort of remain static on the revenue side, you might actually see the stock lift. so i want to make a bearish bet but i want to make sure i'm not doing it in such a way i'm going to get hurt if that happens. >> what's the strategy? >> what i'm looking at is buying the may 70-65 put spread. i'm going to pay $2.45 for the may 70 puts, sell the 65 puts against it for 90. net net i'm out $1.55. this can be worth a maximum of $5 if the stock goes down to 65 or lower by may expiration. that will capture the may earnings event. the worst thing that happens on a 70-plus stock is i'll lose 1.55. >> i love those types of vertical spreads when you think about going into an event like, that a stock like that and a chart like that makes me nervous about being shorted, it could act like a coiled spring and go another way. i'm not calling out our boy carter worth on its technicals. it's a dangerous thing. if you ever saw that movie "food inc.," that documentary, they're coming at monsanto. you better watch it.

michael moore may get on this one. >> i love buying put spreads for one reason. you can sell that down side put and you get paid fairly for that. and we're not trying to guard against some apocalyptic response. we just want a reasonable amount of protection, and mike's trade does that. in addition, there are other fundamental problems. you know, carter laid out the technical story really well, but there's a chinese company that has a generic roundup, and that's a big money maker for monsanto. i like this trade for a lot of reasons. >> let's break this trade down and show you why we talk about options strategy. time for "stocks versus options." and this gets really to the heart of managing risk, which is what we're all about here. if you're short monsanto, you face unlimited risk of betting wrong. but buying mike's put-spread risk, 150 bucks, and can more than triple your money by may. that's exactly what you thought about when you put together the strategy.

>> well, obviously, the other thing is there's a broader issue. i mean, the market could pull back. will that take it with it? i don't know. it actually hasn't been tracking the market so much. sort of like his trade in ibm one of the things is i'm sticking with the trend. ibm has been doing reasonably well this year, monsanto has not. i don't see where you're going to draw a line in the sand and the stock's going to go up. >> you're taking a view you obviously want to be short but you're defining your risk. that's really to me the most important thing about trades like these into events. >> definitely. got to take a break. are you getting nervous ahead of earnings season? you don't have to sell your stocks. dan's got an options strategy that actually gives you upside while protecting your downside for less than $2. find out how after the break. time for "pump up the volume," the names that were heating up options traders' sizzle index this week. the world's number one supplier of smartphone chips, this company has quality built into its very name. and yesterday the wireless warrior proved it, boosting sales and profit forecasts amid a 3g phone frenzy. that had bullish options oracles interested in a different kind of call.

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the company's going to report in may expiration but the surprise preannouncement caught option traders by surprise who might have been short these april options that looked very, very cheap. so they were falling all over each other to cover them. and the other point i'd make is this is a great way to use options. if we had a chart of qualcomm two months ago when they reported q4 earnings, they gave really poor guidance. the stock was down 15%. and here we are. okay. look at the gap back in january. and now this gap up here. you know, man, either this company doesn't know how to forecast their own business or they're just not that honest with their investors.

>> and another thing that is highlighted when you take a look at these types of situations is the fact that when options premiums are relatively low, as they are right now, going into earnings season, it's definitely a great time to try to use options even from the long side, even if you think there's going big vol start, because of this type of die nappic, things can move sharply and they can move sharply in either direction. if you're going to try to make a directional bet you would like to hedge it if it's going to go the wrong way. >> the problem with doing this through earnings, options through earnings is you have to be way right. now, qualcomm moves around. if you can buy cheap options, maybe that makes a lot of sense. but remember, you've really got to be right. and it probably pays to pick a direction. >> well, pick a direction and probably put on a spread, i think. that's probably the best way to do it. >> we're going to stick within the sector. it is time now to make a call where we tell you how to play next week's big event. and we're talking about research in motion. rimm's earnings just around the corner. and if you're nervous about your stock here's how you can protect your profits without giving up any gains.

on "options action" we always spend less to try and make more, even when you're protecting gains on stocks. and with rimm earnings next week, that's exactly what many are looking to do. >> every time rimm reports the stock will move 10% in one direction or the other. there have been big moves on the down side after a report and big moves on the up side. >> let's say he's right. question, how can you protect your shares in rimm and spend as little as possible? the answer, as always, options. in this case the put spread collar. and here's how it works. ♪ you think rimm's stock is heading south, so you buy one at the money put for protection. but that's expensive. especially with earnings just around the corner. and to make money now you need rimm's stock to fall by more than the cost of that put by expiration. so to reduce that cost and raise your odds of success, you would then sell one lower strike put

of the same expiration. and voila. you've just created a put spread. now you've cut your costs. well done. [ applause ] but you've limited your protection to the difference between the put that you bought and the put you that sold. below that lower strike put, your rimm stock is not protected. now your put spread's complete, but you still need rimm to fall by more than the cost of that spread before you see protection. so how can you spend even less so you can possibly make more? sell one out of the money call of the same expiration against your rimm stock. but don't hit the crackberry just yet. there's a trade-off here too. by selling that call, you cap your up side to the difference between where your rimm stock is trading and the strike of the call that you sold. should rimm hit that call strike price, your stock will be called away at that strike price. so you have a covered call with down side protection.

so what do you need to get started? all right. before we do get started, we want to crack open our trusty put spread collar playbook. dust it off, that one. we're going to start off with a put spread part of the package. mike, what do you consider here? >> these are very interesting structures. and one of the reasons that they are is because when you put options trades on, oftentimes long trades are short catalyst types of efforts. you're trying to buy something, making a quick bet on a directional move. when you sell options oftentimes you're expressing a little more of a fundamental view, in other words, deciding this is a value where i'm comfortable getting long or comfortable getting short. when you put the put spread part on, what you're looking for is where does my protection kick in? that's the bet against the short-term direction move. when you're selling that other one what you're looking at is this is a level where i no longer need it because i'm comfortable with the fundamental valuation or i don't take the view the stock's going to move materially beyond that. so other than looking for a little bit of premium on the short option, that's basically what you're looking at. >> in terms of time frame, dan, obviously you want to capture earnings in this case. how far does this go? >> i just want to collar up the catalyst. this is not a structure i want

to leave on my long stock positions. >> how about that call that you're selling, scott? >> there are a couple issues going on here. first of all, you want to write a call that's far enough away from where the stock is now you that don't automatically get called away. the problem with that is you've got to generate enough premium that you can pay or -- hopefully pay for most of that put spread. so you've got to figure out where you want to do that. the further away you write it, the less you get to pay for that put spread. one way to think about this is just think about this as a covered call. where would i be willing to write that covered call? and then how much premium do i get from that to pay for that put spread? >> we should note that rimm is a very volatile stock around earnings. the average move in the last four quarters 13.5%. the imemployed move this quarter.5%. with that said, dan, what is your strategy? >> this is not a bearish trade. you are long the stock and you put this trade structure on because you want to stay long, it you think there's more up side. that said, like you said, melissa, the stock moves around a lot around earnings. this is again a risk management trade around an event. one of the things as we kind of

look at that playbook, one of the things i want to do here is i want to look to may. okay? and i want to sell the may 85 call for $1.50 against my long stock position. i want to use that premium to buy a may 75-65 put spread. i'm buying one may 75 put for $4.75 and i'm selling one may 65 put for $1.25. that was a lot. okay? so here's -- let's look at it like this. i sold that call against my long stock. that give me the ability to buy that put. and then that lower strike put that i sold. and i have it on for $2. so my worst case scenario is the stock sits right here and i got that protection, $10 of protection for $2. okay? so here's the thing. right? i got at the money protection, which is the most important thing to me because this stock does move around. now, if nothing happens, i spent two bucks, 2.5% of the underlying, and i had protection, i could sleep at night into earnings. >> i want to highlight a really important thing about this.

he didn't try to pick strikes just so he could get it to like zero cost, for example. he wanted protection that kicked in right away. he also picked levels where he was comfortable. okay, i'm comfortable long at 65. i'm comfortable getting rid of the stock that i actually own right now at $85. that's the fundamental levels where you've decided you're comfortable getting long and comfortable getting short. when you're selling strangles around it on this put spread that's structured that's what you're doing and you have the downside. >> rimm's out with earnings on wednesday so we shall see what happens. got a question send us an e-mail we will answer during our "options action" 101 web extra. we'll also go to scott's very special exclusive overwrite strategy. go to our website optionsaction.cnbc.com. that's right after the show. traders at td ameritrade 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.

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time now for the final call. scott? >> i like dan's ibm risk reversal. >> dan? >> i look my put spread collar with rimm's earnings next week. >> i'm sure you do. >> dan's rimm trade. everybody likes dan's trades. >> thanks. >> looks like our time has expired. for more "options action." go to our website, optionsaction.cnbc.com. and don't forget to watch our daily "options action" segment in "fast money." "mad money's" up next. >> "options action" web extra. more trades, more insight, more strategies. exclusive info you can't get anywhere else.

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