>> that's exactly right. one of the things that happens in the early part of the earnings season when you get that early data point is obviously it's going to be interpolated to the rest of the sector. obviously there's a little bit of value there. i'm a little bit curious. knocking the stuffing out of the pinata, does that mean there's candy on the ground for us to pick up? >> their innards. >> volatility has suddenly reemerged. we haven't seen it in a little while. so that could be candy as a trader. >> this is why you should buy options when you can, not when you have to. once this news is out if you want to buy protection you would have missed your opportunity. dan says that goldman sachs is a pinata. i'm not sure that the government's done swinging. and if that's the case and you want to buy protection you can still do it. the vix was up quite a bit today. up 15%. but it's still below the level at which it usually is this time of year. so you know, you miss a chance to buy some protection but you can still do it if you have to. >> there are other ways that you can buy protection and still mitigate the fact that volatility is -- >> all day long in days like today we get questions, how do i play goldman sachs?

well, i sure as heck wouldn't buy the stock at this moment, at this moment in time. but what did we see right after the stock got hit? it was down 10, 11, 12, 13%. we saw call buyers. we saw short dated call buyers, people who think this thing is going to get overdone. then we saw call spread buyers -- >> meaning april expiration? >> no. may. good question. we saw may call spreads, july call spreads. we saw call spreads going up. and this is how people can define their risk if they want to participate in the up side. >> that's exactly right. we saw tons of options activity in goldman sachs. it was just over 800,000 open interest coming into today, and about halfway through the day we already saw about 400,000 options trading. it was about 220,000 or 230,000 call buyers to, you know, probably about 20% less put buyers. by about 1:00 in the afternoon. >> how does a spike in volatility change the way you approach using options to initiate a trade or protect yourself against it? are we expected to see next week volatility simmer down a bit so that's your opportunity to buy -- >> it could. i wouldn't be surprised one bit. because when the news comes out that's when everyone's in panic mode.

that generally is going to start being reflected both in very rapidly escalating options prices and also the way that stocks behave. obviously, over time when people have the opportunity to try to sift through this information and figure out what it really means you're going to see that come in. you're going to see both the realized volatility, how much everything's -- >> that said, in the near term vol's going to stay very elevated in goldman sachs because there's a huge unknown out there. >> well, that's exactly -- you're not going to be able to sift through and find an absolute answer in the next week or so. >> and one way to play options where you're not particularly dependent on changes in implied volatility is to use spreads. generally vertical spreads. and this is a perfect example of when you should do that. doesn't matter if you think the stock's going to go higher or lower. the way to play it is probably with vertical spreads as opposed to outright long or short options which are hugely exposed to volatility changes. >> mike, you've got a strategy on morgan stanley. >> well, that's exactly right. a lot of people are talking about is there going to be another shoe to drop, is this going to be the end of it. i mean, it's hard to imagine it all stops here.

of course as we pointed out options have become more expensive. if you look at a vertical spread, for example, that will still be more expensive. so what i'm looking at doing here is a trade in may on morgan stanley where basically we were looking at it you'd put out no premium. i would buy one may 29 put and sell two may 27 puts against it. when i was looking at that, the may 29 put was about $1.40, and the may 27 puts were trading for about 70 cents. now, one of the important things about verticals versus ratio verticals, which is what this is, is that obviously this is a bearish trade betting that the stock is going to decline. but at a certain point you're going to get net long. that's the net effect of being short two of those may 27 puts. net net this trade would break even at $25. consider that where you'd be long morgan stanley. let's remember that right now ahead of the earnings we're looking at this thing trading at about ten times forward earnings right now. so if the stock came in you might own it -- >> if you can, mike, really specifically break this down because there's a sweet spot to this trade -- >> sweet spot is 27 bucks.

if the stock goes down to $27, that's where you've hit the home run on this one. and an important point is that by not putting out any premium we're not necessarily saying okay, this is the kind of trade you always want to do if you have to put money out to do it. what we're saying is if it does continue to go lower this is one way to capitalize on the fact. and also create a level where you say here i'm comfortable -- >> here's another example of a situation where people say i don't see morgan stanley mentioned in any of these circles as far as goldman sachs but the stock has underperformed goldman massively. the stock was down in sympathy today. i like this structure and i'll tell you why for a couple of reasons. if you're inclined to maybe buy the stock and you think there's some near-term down side you could put this trade structure on saying worst case scenario i get long down 10%, 15%, something like that. the other thing to scott's point earlier about these spreads, this actually because you're selling two of those down sides, you are net short volatility. the whole situation settles in a little bit, you're going to make money on the vol compression on those two that you're short on the down side. >> but of course a very, very important point to make on this

trade, you have to be willing to get long morgan stanley's stock at $25. >> that's always the case whenever you're net short puts. >> and the important thing also to remember is because of that, because you may have a stock put to you, you have to leave premium with your broker. i do think it's interesting. mike points out that the net where you would get long is $25. now, last year that was the low in may. in june it's been support for this stock. so it's probably not just an accident that mike has picked a trade where $25 is where it all matters. >> let's do a little bit of stocks versus options just to really lay it out for you in terms of the capital efficiency of this trade. if you had shorted morgan stanley you face unlimited losses but worst case scenario in mike's spread you end up owning morgan stanley at $25 a share if it reaches that or 2500 bucks for 100 shares. dan, at this point is this a trade that you would put on monday? >> again, you have to have some conviction about morgan stanley. you have to have a view on the stock. and i think if you do, if you're long here's some cheap protection, you're not paying anything for it.

if you're long and willing to get longer much lower, down 15%, it's a good structure. >> okay. let's move on here because i know you've heard about goldman sachs and the financials all day long. from now on financial-free zone rest of the show. promise. believe it or not, there is news outside of goldman sachs. i know you're shocked. it is, after all, the biggest week for tech earnings, kicks off next week on tuesday when america's favorite stock, apple, reports earnings. so it's time to make the call. but before we get to apple let's talk tech broadly. some pretty big moves expected, and of course we got google earnings yesterday night and then we saw some big action today in the stock as well as the entire sector. >> well, listen, we make this point all the time. google is also a very company-specific story. they dominate their field. and they actually generate, you know, 97% of their revenue is from one product. they don't give guidance. they're really cagey with the street. so this is a stock-specific story. earlier in the week we saw intel. that is a much more macro story. they sell across geographies, to a lost different businesses. the guidance out of intel was fantastic.

so i think the macro picture for tech looks really good. okay? but then again we're at 52-week highs in the market. you've got to roll up your sleeves. this is where you earn your keep, you know, by picking stock stories. >> let's take a look at some of the implied moves. amazon, for instance, 8% plus or minus. apple 4.5%. mike, how do you make sense of this? >> the first thing i would talk about is in the case of amazon that 8% this is a stock that has moved quite a lot on earnings. i think the average magnitude of the moves on earnings over the course of the last eight quarters in amazon is actually 9%. so i don't think we should be that surprised that the options market is pricing in the possibility of a material move there. some of the other moves, i mean, 4%, is that all that crazy for a tech name on earnings? not necessarily. a quick highlight i'd make about google too, the earnings number wasn't so terrible. so as a broad economic indicator

that's not so bad. one of the concerns people had there was a cost issue, cost for google as they're going forward. so i think that when you try to interpret that data it doesn't necessarily spell disaster for tech space in general if you take a look at what happened in their earnings. >> in all these names these names didn't do well today but none of them got crushed. yahoo down 4%, that was really disappointing, but the rest of these names are down -- many of them are down less than one full percent. they did pretty well in a situation where a lot of tech investors could have said hey, this is the opportunity i have to go ahead and let the market have some of these back, there's bad news and i don't want to participate. and for a lot of these names that did not happen. >> all right. let's get straight to it. dan, you nailed this before. we saw an apple earnings before and you had some very good fundamental commentary on the stock and a very good trade. so first your fundamental trade. >> wow. thank you, melissa. >> welcoming you back. >> thank you. and welcome you back, too. the stock has been basically a straight line for the last year. actually in the last two months the stock is up 25%. i mean, that's just a massive, massive move. so here's one of the similarities between google --

or a couple similarities. expectations going into earnings next week are very, very high. okay? and then the other thing is that you know, this company is very -- it's very -- they're in their own little world here. you know what i mean? they dominate what they do. so that's the other thing. listen, the quarter is going to be just fine. the guidance is going to be just fine. the launch of the ipad was undeniably a huge, huge success. so now people are getting focused on late june, new iphone. okay? and anything in between is just gravy. all right? so everything's good. except the stock's up a lot. expectations really high. we would never tell you to sell apple in a million years. you may never hear that on this program -- >> well, not out of your lips. >> not out of my mouth. big fanboy over here. but. okay? apple is up a lot like we just said. going into next week's earnings, here's a couple things if you're inclined to buy the stock here, you think the stock could go higher based on this announcement or you maybe want to take some of your stock off

the table you've been long for a while, here's a trade structure that gives you the same long exposure. okay? but you're defining your risk or you're setting the points at which you get long. one of the things i want to do is we just talked about vertical spreads. i want to buy a may call spread. i want to buy the may 250-260 call spread. i want to pay $3.50 for that. that's not a great risk-reward. my max gain is $6.50. i'm paying $3.50 to make $6.50. i'm buying one may 250 call for $7.80 and i'm selling one may 260 call against it for $4.30. now, what could i do to maybe mitigate some of that cost? i could look to a put strike where i would be perfectly happy, i'll say it again, perfectly happy owning the stock. if i'm going to sell a put. so maybe i would sell the may -- not maybe. i am going to sell the may 230 put for 3.50. now, i get this whole structure on for even money. so how do i make money and where are my sensitivity points? i literally get long if the stock is at 250 up 1% i get long. but the trade-off is i've capped my gains at 260. i cannot make a dollar more than 10. okay? now, i've also sold that down

side put strike. if the stock goes down. okay? down to 230 or so, that's where i get long. that's down about 7%. i actually think that would be a really healthy level to get long. the stock needs to come in a little bit. >> i love these types of structures because you highlight a couple really important things. we talked about the general level of options premiums, volatility being elevated here. you're selling two options. you're not net long premium. that's what the zero cost element is. the other thing is also figuring out where you're comfortable getting long after the stock might look like it's gotten a little bit stretched. this is a company that it's really hard to figure out why it's going to pull back. they've got some other good things happening later this year. so it's hard to really get pessimistic. but if you do feel like it has gotten stretched this is an opportunity where the worst thing that hands is you get long a little lower. >> and never forget that just because you buy the stock at 230, you have it put to you, it doesn't mean that you have to put it in your retirement account and live on it forever. i mean, this can be a trade. i don't know what i think about this. dan is -- has been right about apple. and if i were to go with this it would probably be a case of betting on the jockey and not the horse. the thing i do like is the stock

has to fall a bunch before you get it put to you. so you do have more than just a little bit of breathing room. >> dan, are you feeling the pressure here? we really talked you up tonight. you have to tune in next friday, see how it all turns out. coming up, how would you like to triple your money betting against stocks? mike did exactly that a couple weeks back on this show. find out how he did it right after this. time for "pump up the volume," the names that were heating up option traders' sizzle index this week. this online search site always has the dubious title of second runner-up. falling behind a dotcom goliath when it comes to clicks. but options traders were foregoing google and searching their screens for this company's exclamation mark head of its rival's earnings report. who is it? the answer when "options action" returns.

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where were options traders pumping up the volume this week? yahoo. at one point this week call volume was three times its average daily volume. welcome back to "options action." you just heard how yahoo calls were heating up that sizzle index.

the stock actually outperforming rival google this year but a key test comes next week with its earnings. dan, in terms of the direction of the trade, where were they saying yahoo stock might be headed? >> a lot of call buying in july, up in the high teens. it just went there. okay? the stock had a big, big ramp in the last couple weeks. and you know, i think this is a stock that's been in the doghouse. they've just had this microsoft search deal kind of put in place over the last six months or so. maybe it's just a bet on a stock that's been a laggard. >> going to move on here because it is time for the up side call, where we show you how to manage a winning options trade. now, until today picking losers in this market has been tough. but mike identified one name and tripled his money on the way down. here's how he did it. on "options action" the only thing better than risking less is making more. and that's what mike did with his bearish bet on monsanto. >> what i'm looking at doing here is buying the may 70-65 put

spread. >> mike, mike, mike. it's "options action," not a french film. break it down. mike thought monsanto's stock was a bad seed, so he looked at technical analysis to confirm his suspicions. enter carter braxton worth. >> the stock market over the last year and a half is surging. monsanto not participating. 70, 70, 70, and now hovering at 70. the presumption is a bad break to the down side. >> bingo, mike thought. shorting the stock would have exposed him to limitless losses. and mike wanted to define his risk. so he bought the may 70 strike put for $2.45. that's the most he could lose. now to make money mike needs monsanto stock to fall below that put strike price by more than the cost of that trade or below 67.55 by may expiration. at 2.45 why not just buy the farm?

>> i'm going to sell the 65 puts against it for 90. >> that's more like it. to spend less mike sold the may 65 strike put for 90 cents and created what's called a put spread. between the 2.45 he spent buying one put and the 90 cents he collected selling the other put, mike cut his costs by more than a third. now profits come sooner. instead of needing monsanto to fall to 67.55 to make money, mike can now profit if monsanto falls below 68.45 by expiration. but there's a trade-off. in exchange for selling that put and lowering his costs, mike capped his gain to the difference of the strike of the put that he bought and the strike of the put that he sold. no worries because since the time of the trade monsanto's stock has hit a new 52-week low. now this dynamic duo do everything together. but between trips to the beach

and dancing with the stars, guys, don't forget about your trade. >> i think we've jumped the gun here. >> good point, carter. the clock's ticking, and america wants to know, what will these two do now? >> quite a happy couple, aren't they, america? and here is why. let's play some stocks versus options. had you shorted monsanto shares, you would have made 9% as the stock fell but face unlimited losses if the stock had rallied. mike's put spread risks a maximum of $150 and has nearly tripled in value. carter, unfortunately, as you know, mike, is not here. what would you do at this point? >> well, this is one of the interesting things about a spread trade. if you were just outright short the stock and you still thought it was going to go to, i don't know, zero -- i mean, i'm not saying it's going to go there. then you would obviously have more of a decision to make. but actually, it's pretty easy for us, and the reason is there's only so much you're going to capture out of these verticals and we've gotten most of it. we keep talking about this. you always want to take a look at the risk reward. when you keep the trade on the

most it could be worth is $5. we've gotten most of it out of it. you probably want to look at taking it off now and taking your money and running. >> the interesting thing about monsanto, we talked about it at the time, is a lot of the headwinds they face come out of china. that is, they're opaque. we don't really know what the story is as far as competition is concerned. so a great way to define your risk is to use options. so that is buy options -- that's another reason that mike's trade made so much sense. >> and another reason is when carter laid out the technicals for us a few weeks back that stock was near 52-week lows, there weren't too many stocks near 52-week lows. it takes a lot of you know what to short stocks at lows like that. >> name your body part. >> that's why options work out pretty well. you're defining your risk. >> yes. >> and of course our thanks to carter braxton worth, who is not here today but is in mike's heart. got any questions, send us an e-mail we will answer during our "options action" 101 web extra. do go to our website, optionsaction.cnbc.com. scott's got a strategy, on

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my friend jim cramer's got all the bases covered on the back of this goldman story on a very special edition of "mad money" that is right after "options action," top of the hour. time for the final call. scott, what do you say? >> i'm going to make a liar out of you. we have to watch goldman this weekend but remember you can still buy protection if you have to. >> dan. >> i like stock replacement trades into apple's earnings next week. >> goldman isn't the only story. the one buy two put spread in morgan. >> looks like our time has expired. for more "options action" go to our website, optionsaction.cnbc.com. thanks to the traders. i'm melissa lee.

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