we're so dominated by the apple right now. and we are in a 10% correction. taste, that does it for "closing bell." thank for watching. >> "options action" starts right now. this is "options action" your front row seed to the smart money. tonight the ultimate apple trade. we have a way to make money on apple, if the stock goes up, down, or nowhere at all. don't bother asking seery. plus talk about a steal of a deal. how would you like to get paid to buy ford stock ahead of earnings? it's not some crazy sales drive. it's just cohn carter's trade. and why were all those

option traders piling into watson pharmaceutical calls? it's a tale of drugs and money that only scott nations can explain. the action begins now. live in time square,s in "options action." i'm simon hobbs. these are the traders. we have to talk about apple, a correction over the last couple weeks. some of got as high as 1,000, you should be worried. that's when the smart money -- i mean the big money started making profits. the apple thing is a mania. we know there's great things going on, but the run wasn't sustainable. it had a parabolic move. the stock is down 10% from the highs from april 10th, more than $50 million in market cap. there are only 50 or so stocks

in the entire s&p 500 that have market caps of 50 billion or higher. >> when you're talking about a stock this big, you end up with portfolio risk. some guys will have to lighten the load. a mutual fund that has exposure, they are not going to let their portfolio be represented more than anywhere from 3% to 5%, so they are going to have to start selling into any kind of strength. at a certain point of time, i think we saw someone with -- price target on the stock, but realistically just try to think about what the company has to achieve to deserve that kind of a price. >> or, scott, what it means for the broader market. this is a market cap. >> and look at the nasdaq today, actually all week. the nasdaq, some are calling it the nas-apple, got crushed today. apple has been all over the week. what this means is there's something going on, it would

move big one way or the other. earlier this week we saw 960 calls, the highest strike out there, a bunch of them traded monday and tuesday. >> you know, there's one other thing. the tech space, it's not like apple is the only stock that people should be focusing time and attention on. we did have results out for microsoft, saul some stuff from intel, so you might be thinking about diversifying away some of the risks from what is a popular hardway manufacturer. >> the intel and microsoft results point of in a different direction i want two of the best-performing sectors in this historic q1, they closed on the low of the week. that's really bad action, considering they prisoned q1s

that were better than expected. some of these things are going back to important technical levels. qualcomm we would be remind not to mention, so in a lot of ways, there are some warning signs for some of the previous market leaders. >> let's cut to the chase on this. apple is out with earnings nest tuesday, dan now has an options trade who will make money if it goes up, down or actually does nothing at all. it's an options strategy that is called selling an iron condo. here's how it works. the run the strategy when you think a stock is range-bound. you make money by and out of -- now, it sounds complicated, but the bottom line is you want the stock to effectively go nowhere by expiration. with all that said, dan, what is the trade. >> that's a great description. it sounds complicated, but in a

lot of ways you're defining your risk. in the last ten days, the stock has been moving around an awful lot. i'm willing to make the bet that things will settle down after earnings, that it's not going to be a huge surprise one way or another, and some of the people that had the angst of buying it above 600 and selling it at 570, actual settle down after tuesday, so i would look at the weekly options, and i would sell an iron connedor, so i want to sell the april weekly 626-10, call spread, sell that for about $2.50. that's when the stock is about 574. then i want to sell the april weekly 545, 535 put spread for also about 2.50. 245 gives me a net credit of $5 in premium. my max loss, is $5, so i'm

risking 5 to make 5, but if the stock is in two the two short strikes, i can make that $5234 premiums. i like the odds of that. >> this is really interesting. right now apple's volatility, is that's about an all-time high, which is really unusual. it's very tempting to want to sell volatility. of course, then you face unlimited risk. still allows you to try to collect some premium. apple traded twice in the market premium essentially this mike an attractive time to sell it. >> complied volatility is about three times what it is on, say, the s&p. the way to look at this is you're selling a call spread and a put spread, and, you know, yes, this can make money if apple goes up, but only if it can go up a little.

the thing here, is the excuse is critical. you have four legislation, because options in apple tend to be about 25 cents wide. you really have to watch your execution, put the whole thing in as a single spread trade. >> what happens if you get a big move. >> you know, they do less than one%, a wide band where there's a small probability that you're going to lose it. because it's four legs, it's really wide, you want to put limits on this thing. i've in and out done this yet. i'm going to do it on 3:00 on tuesday. this thing is moving around a lot. if you do this first thing monday morning, you can find yourself out whack. >> we're talking, yes, stocks versus options. if you want to buy apple into earns on tuesday, you need

almost 58,000. the only way to make money is if the stock goes up, dan's connor makes him money whether it goes up, down or nowhere. if it goes nowhere at all. if you're confused by any of this, just ask siri -- maybe not. [ laughter ] ford releases results on thursday, as regular viewers will know, mike has an options trade that actually pays you to get long of the stock. before we get that, let's call on the charts, with carter braxton wirth. >> good evening. >> i have four of them, they're all the same time frame. here's the first one. it's a two-year chart. the important thing is in the weakness of last spring, we came down and held the lows, which is in many ways called the double bottom. another was is the second chart, which shows the stock breaking

it down to an exact same time frame, well-defined, breaking above the trend. that's another cruxive circumstance. they are way to draw the chart, the trend like that's now formed subsequent to the break, which is to say we're right on this trend line, due for a bounce here. any stock that dips to its -- is in a position to rebound. give us a fundamental view? >> i think one of the reasons why people is because they're concerned about things going on. obviously ford gets about 60% of its risen from the united states, though, and probably 10% to 12% unit growth sales, about what we experienced over the last 12-point period. that by itself would offset a

70% decline. they have good products coming out, a newd fusion, which basically looks like an astin martin sedan. on a valuation basis, people like to look at price to earns multiples. in ford's case, trading about 6.5, 7 times its earnings. ebitda basis a bit more expensive than its peers, but that might be a demonstration they are really using their leverage. >> mike khouw, thank you very much. this is a bullish strategy where you sell a put and use that money to buy a call. the goal? you said it to rise above the strike, however, it's not all good, and since you're short that put, you mish willing to buy the stock. that said, mike, what is the trade. >> i'm going out to july. i'm going to sell the july 11 puts and use those proceeds and collect some of the extra money i'm getting and buy the 13 call

for 20 cents, so i'm going to collect 20 cents, over a three-point period, annualize that, down side is obviously in the stock trades lower, you could be forced to buy $11. down about 7% or do from where the stock is currently trading. you might say that doesn't seem like a very big decline. the stock basically hit a low within the last 12 months or so, i think on that chart was just below 940, but the fact of the matter is if you're making a bullish play, would you rather buy the stock right now or collect a little over 1.5%? >> i think there's disagreements on the platform? dan? >> it's funny, might be is one of the smartest guys i know. i actually hate this trade for a lot of reasons. when i back this thing out and look at the $10 left, there's a massive head-and-shoulders top forming. you've selling a put a dollar

above that. to me, i don't sees it, and i can't speak to the fundamentals here, but i don't like selling that three months out to july for 40 cents only. maybe you wait for the earnings to come out, then you see what's going on and make that bet. >> are you going to adjudicate? >> when i bust yew chops to selling cheap puts, you get up in arms. now you're doing it -- >> i don't sell them naked. you're talking about when i do it on a spread, when it's covered. this is a very dangerous time. i don't think you said toby naked. >> that makes sense. we like risk reversals in general, because you generally get the math working for you. the problem is if you get it down do $10 or $9, i'm probably trying to put it down there. >> fundamentally i do like the story, and really what it comes down to is i can either own the stock or with some concern going into the summer and the way

stocks have been acting generally, you have the possibility i might own it where it is. so i'm using this as an alternative to it actually purchasing the stock. i think that's what we have to be talking about here. you will take a bit of rick as an alternative to buying the stock. i think this is a better option. >> let me emphasize that. if you want to buy -- this is the point he's making. if you want to buy foreahead of earning, that will cost you about $11.60. options trade actually pays you $20 to put the trade on, and worst-case scenario, you might have to buy it for $10.80 or 7% discount. we will see carter on that very question a bit later in the show. meantime, if you've got a ques, the address is option as is @cnbc.com. and that's right after the show. we also put trade caps as well. here's what's coming up next.

hope you didn't break the bank. last week dan tried a bearish bit on morgan stanley, but the stock has only gone higher. it can downturn this trade around. find out when options action returns. time for pump up the volume -- the names that are heating up options traders. it's elementary. these gills are one of the biggest generic pharmaceutical companies in the country. it looks like they have money to burn. they're on track to buy a swiss drug maker for some $6 billion. options trader followed a big course of call volume, leading a major acquisition is just what the doctor ordered. who is it? the answer when "options action" returns.

what is in pharmaceuticals? a one-point call activity was almost 11 times, the average daily volume. >> time now for total recall. last week dan made a bearish call on morgan stanley stock shares, have since rallied a bit, but he's still in the game. here's why. >> justsh unfortunately, that's

what happened with dan's trade. dan couldn't stand shares of morgan stanley. they mayant to define his risk. the may 16 -- >> now, to make money, dan needs morgan stanley to trade below that put strike price by more than the cost of the trade or below $15.5 by may expiration, but 45 cents? >> it's not inconch quenchal. >> i should say not. dan shows us how to do this for less. to spend less, he sold not one, but two of the may 14 strike puts for a total of 26 cents. but he did something even better. he made making money easier, and all it took was simple math.

between the 45 cents he spent buying one put and the 26 cents he collected selling the other two lowest strike puts, dan reduced the cost to just 19 cents. now, instead of needing morgan stanley to fall below to make money, by cutting his costs, dan can see profits if the shares fall by more than those 19 cents, or below 15.81 by may expiration, but there's a trade off. by selling more puts than he bought, he could be forced to buy morgan stanley stock at that low put price, or in this case for $14, even if the stock falls well below that level. with the money he made on the way down, he wouldn't see losses until the stock reached about $1. below that, dan would lose money. >> be prepared for all potential

outcomes. >> instead you're right, and to protect himself, dan bought the strike put for four cents and created it for a total cost of 23 cents. now dan's protected, but since he spent more, he won't make as much. to see profits now, dan needs morgan stanley stock to fall by more than the 23 cents he spent on the trade or below 15.77 by may spiralation. since the time of the trade morgan stanley shares have been flat. leaving dan with a stuff choice, take a small loss or hold out for bigger gains. "options action" biggest fan is tuned into the show. he only wants to know what thing -- what will dan do now? in you simply bought that may

16, you would have lost more than half your money. if dan closed out today, he would be looking at a loss of about 30%. when you risk less, you lose less. banks clearly tonight it on the chick today. are you staying with the trade? >> yes. i'm feeling better about it. there was enthusiasm about it, but the stock is basically up a tad for the week. i wasn't playing the earnings, but sentiment, a poor technical picture and moody's going to downgrade this company. to me, i used that structure with defined risk, because i wanted to hold out. >> mike? >> i gra el wholeheartedly. a relatively cheap weigh, it's not only a cheaper one. we really aren't see the fundamentals that will drive these institutions. at this point i think people are very concerned. >> particularly in a financial space. as we said, the only problem with this trade. it's got to hurry and get lower.

you probably want to take this off before expiration, take this off with time to go. >> okay. with the bad came the good. time now for up sideshow. we look back at our winners. last wee k chow bought -- >> and starts to break, the first day is never the end of it. so today is the first day of the break, news related earnings quite good, not good enough. stock presumptively goes lower. we would stay short. >> mike? >> my full disclosure, i went to which i policy lay three times since i put the trade o. but still want to stay short. >> how was it?

>> outstanding. >> because it trades 60 times earnings. that's the kind of trading i do. >> look, if you want updates, be sure to follow us on twitter, and dan posts regular updates of his trades on twitter, which is avmt riskreversal. up next the final call for the options bids.

scott nations? >> i like dan's apple trade, but if you do what he -- then adjust your stripes. >> and i agree with that. listen, the fever is kind of broken to the up side on apple. be careful. volatility is very high. you can get the direction right, but the trade wrong. >> there's a lot of hyperbole, but if you're long that which i pot lay spread -- >> and congratulations on the iron consistor. i know you are ecstatic.

more "options action" go to our website. we will see you next friday at 5:00 eastern. "money in motion" is up after this break.