bye-bye. 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 siri, because dan nathan will tell you how. 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 from the nasdaq market site

in times square, this is "options action." i'm simon hobbs. these are the traders. we have to talk about apple, a correction over the last couple weeks. how worried should people be? >> when you button a frenzy when all street analysts were tripping all over each other, some 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. higher, lower. 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 hardware manufacturer. >> the intel and microsoft results point of in a different direction. >> two of the best-performing sectors in the historic q 1, we would be remiss if we don't talk about how the banks closed. that's really bad action, they had q 1s better than expected. when you see things coming undone in the financial space, some are getting back to important technical levels. tech leadership. qualcomm, we would be remiss not to mention, so in a lot of ways,

there are 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. by selling an out of money call spread and out of the money put spread of the same expiration. it sounds complicated, but you effectively want the stock to 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 condor. so i want to sell the april weekly 626.10, sell for $2.50, when the stock is about $5. 74. 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 might be 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 1%, so the probability really is where have you this band, this really wide band where there's a large probability where you will make this money and a small probability that you're going to lose it. scott made a great point about execution. because this is four legs, the bid act is really wide. you want to put bids 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 by the time it's 4:00 on tuesday. >> we're talking, yes, stocks versus options. if you want to buy apple into earnings on tuesday, you need almost $58,000 and the only way to make money is if the stock goes up. dan's condor makes him a maximum of 500 bucks and can make money if apple 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 constructive circumstance. third 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. the smoothing mechanism. the average. a well tested, time tested rule of thumb. any stock that dips to its -- is in a position to rebound. in the long here, we think it plays up to nice of 14. >> gives us a fundamental view here. >> i think one of the reasons why people is because they're concerned about things going on. obviously ford gets about 60% of revenues from the united states, though, folks and we are expecting to see probably 10% to 12% unit growth sales in the united states, about what we experiencedory the last 12-month period that would offset a 17% decline in european sales. they have good products coming out, a new ford fusion, which basically looks like an astin martin sedan. first time they have something compelling to sell right there. price to earnings multiples for

these types of names. 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. mike is doing a risk reversal. this is a bullish strategy where you sell a put and use that money to buy a call. the goal? you want the stock to rise above the strike of the call bought. however, it's not all good, and since you're short that put, you must be willing to buy the stock. that said, mike, what is the trade? >> i'm looking at here, 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-month period, annualize that, and down side is obviously if the stock trades lower, be forced to buy it at $11.

and down about 7% or so from the stock 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 level, 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? >> would i bust your chops for selling cheap puts? you get up in arms. now your 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 with ford, if you get down to 10 bucks or bucks, i probably don't want to be long 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 ford ahead of earnings that will cost you about $11.60. this pays you $20 put the trade on. worst-case scenario, you might have to buy stock for $10.80, or a 7% discount. we will see carter on that very question a bit later in the show. meantime, if you've got a question, the address is option actions@cnbc.com. we'll answer it on options extra 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 bet on morgan stanley, but the stock has only gone higher. with money still on the line, can dan turn this trade around?

find out when options action returns. time for pump up the volume -- the names that are heating up options traders sizzle index this week. it's elementary. these guys 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, believing a major acquisition is just what the doctor ordered who is it? the answer when "options action" returns.

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where were volume traders pumping the volume this week? watson pharmaceuticals. a one-point call activity was almost 11 times, the average daily volume. >> time now for total recall. we look back on trades that are just in no-man's land. 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 told us they may downgrade this. >> but shorting the stock?

this chap is too smart for that. to define his risk, he bought the may 16 strike puts for 45 cents to make money, dad needs morgan stanley to trade below that put strike price by more than the cost of the trade or below $15.55 by may expiration. but 45 cents? >> u.s. not inconsequential. >> 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 $12. below that, dan would lose money. >> be prepared for all potential outcomes. >> i deed, you're right, mr. gourdman. and to protect himself, dan bought the strike put for 4 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 expiration. since the time of the trade morgan stanley shares have been flat. leaving dab dan with a tough 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.

the numbers came out. there was an enthusiasm about it. but the stock is basically up a tad for the week. this is a trade, 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 agree whole heartedly. a relatively cheap way to make money, now 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. so you don't have to pin that middle strike. with the bad came the good. tomb now to look at our winners.

last week couh and carter bought the $3. 0 p80 put spread on chipot chipotle, now worth $10. >> 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? staying long? >> i'm staying long. put spread, short, absolutely. and full disclosure, i went to chipot chipotle, three times since i put this on, and i 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 @risk reversal. up next the final call for the options bids.

welcome back. time for the final call. the last word for the options pit. scott nations. >> i like dan's apple trade. but wait to put it on and adjust your strikes. >> 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, comparing ford and chipotle, but if you're long in that chipotle, stay. >> and congratulations on the iron condor. 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.