talk about imagination at work. and tanner has a trade on ge that can make five times your money in two months. why were all those options traders being arena pharmaceuticals in it's drugs and money that only scott nations can explain. options action begins right now. >> the world's largest exchange.

financials stabilizing the market after the day's volatile selloff. dow, nasdaq, s&p closing near the highs of the day. let's get in the money and find out. mikey, what stood out to you today? financials had a nice snap back. >> it caused a little bit of a bounce. i don't actually think the stock is up sharply this morning. it gave back a lot of gains. that is troubling. i'm looking at the broader economic picture. take a look at chinese manufacturing index. both below 50 and going lower. that's bad news. this bifurcation in commodities also really bothers me. oil is declining. the only thing that seems to be holding in there is gold and stocks. you either have to believe we're in kind of a deflationary

environment. that's troubling for risk assets. >> i'll tell you what you should be worried about. show up that chart between the correlation of crude oil and the s&p 500. folks, if this doesn't tell a good story, i don't know what does. you want to call that a correlation right there? look what kraourd oil has done that we have seen cross the commodities space. >> we'll see bull market leaders point to prices as beneficial. >> if they're going down for the right reason. >> exactly, scott. and that's the problem. lower crude is showing us lower global demand. it's the first time in the last few years we are talking about a potential global recession, not just a european problem. global recession forces are much stronger than monetary policymakers. >> pocket square in. he's ready to rock and roll. >> all i want to say is look out below. >> that's my point. >> that is terrifying. the thing is, we already had a bunch of volatility.

for option traders, realize volatility is what you get when you buy options. we have had a boat load of it. just above 18 is right at the average for june 22nd, going back about 20 years. so i think options are actually fairly pricier. they're actually lower than they should be given all the problems we have in europe. one thing about uso, the crude oil, etf, you have to go back to may when more puts traded than calls. i think this break in crude oil is a big surprise. >> crude oil broke below 80 bucks for the first time since october 2007. if you look at some of the reports that have come out across the street, mikey, people say, where's is the bottom? pick a number. >> where is the bottom in crude oil? you have two problems, contracting economic growth and you also have record supply. we're pumping 91 million barrels a day. that is bearish for crude.

for equities, it isn't only crude dropping. a broad basket of commodities traded lower. we have seen a long-term yield. all of those things are badding for equities in the long run. >> the lower crude price shows one other issue we will get to when we talk about walmart. luxury goods, retailers like coach negative on the year for the first time. tiffany's is down 20% on the year. meanwhile, dollar general is up 25%. >> yeah. you have walmart, up 12%. >> general electric, it's our former parent company obviously as a way to get short the market here. why ge? >> so, ge is, again, largest global industrial company in the world. if we're talking about global recessionary forces to me ge is one of the go-tos. interestingly, though, it's been quite strong. it has a 3.5% dividend. 50% u.s., it has a bit of a u.s.

buffer. global pmis are showing it's spreading. philly fed at negative 16 this week which shows potentially u.s. is getting infected as well. >> not to mentioned fact imelt, the ceo has done a great repair gone on ge capital. he hasn't been nearly as bearish as others regarding china. elsewhere in the emerging market space, perhaps. but china he has not been nearly as bearish as others have. >> have you look at caterpillar, which has a heavy focus on china and china-related situations, you can see caterpillar has taken a hit over the last three minutes and ge has held up. i think ge follows caterpillar lower. >> that's right. this is a common way to make a bearish trade. let's review by opening up the playbook. bearish strategy. you buy one, put, lower strike

put of the same expiration to reduce your costs. how do you make money? you want the stock to fall to that short put strike. that's where you make the most money. it's also where your profits are capped. with that said, e, what's the the trade? >> so in this trade i'm going to buy the august 1917 put spread in ge. the stock closed around 1981. when i looked at it, the august 19 puts were 45 cents. i'm going to buy one of those and sell one of the august 17 put toss reduce my cost. so my oelt outlay will be 30 cents. breaking level is $18.70. below that level i start to make money. i max profits of $1.70 below $17. now, the important thing to note is the volatility on ge in general is quite low. if you want to do just a put as opposed to a put spread i think that would make sense. in this situation, i sold it to

reduce my cost a little bit and have it only 30% output. >> i don't like buying put spreads on ge. ge capital say buffer. dividends are a buffer. i don't see any way that ge gets down to 17 bucks in this time frame. >> mike? >> how is capital going to be a buffer if we run into another crisis? to me that's where the company ran into trouble with the last time we had a credit crisis. >> if we're going to run into a crisis, everything is going to go down. >> the one benefit of this trade is it's august. they will report july 19th. we should see that weakness from global demand come into play. >> all right. let's wrap this up with stocks versus options. you want to short ge? you better have a lot of money in the bank as shortage carries a lot of risk. 5-1 payout and only risks 30 bucks. that's why we're talking options.

selloff in crude has given a risk to one particular retailer, walmart. crude has fallen 28%. meantime, walmart shares rallied 15%. over that same time. will the run continue? let's make a call to the charts with the one and only cbw. pocket squares looking pressed and ready to go. >> sure. let's have a look. bottom line, we would fade this rally in walmart. here we go. two-year chart. well-defined trend. the whole conversation going to focus on this move from 58 to 68. so there you are above trend, if you will. but let's look at some others to put this in context. this is the stock in relation to the smoothing mechanism. the average. in principal, the question is, how far above trend can you get or how far below before you have mean reversion? take a look at the 10-year chart. how far above or below the smoothing mechanic anymore can

you get? here's the answer. in the last decade, this only happened 15 times that the stock has been 12%, which is what it is now, above its smoothing mechanism. if you look at how walmart behaves three and six months after that, it's down every time. long-term chart, this is since the big run-up when they were taking over the world. we have approached the all-time high. in principal, when you first get back to a well-defined epic high, you respond to it. you don't exceed it. mike? >> well, it's interesting. walmart for quite some time traded at a discount to the broad market. right now it's trading at a premium. just under 15 times earnings. that's kind of interesting. what's also interesting is they have seen a growing percentage of revenue from overseas which is exactly what we're saying. they have almost 9% revenue growth overseas. the u.s. has been completely

flat. if what's going on overseas affects that growth there is no growth. so i think that's definitely one of the issues that i would be contending with when i take a a look at the stock. it's a yield trade because it has 2.5% dividend. when people see treasury yields dropping that serves as a tail wind for the stock. if the reason that's happening is because of that contraction, then that tail wind could cease. that could turn into a head wind. >> mike obviously has a bearish view. it's the simplest trade that you can do. let's open the playbook to see how it works for those new to the show. when you buy a put, you want the stock to fall by more than the cost of the trade. >> august 65, about 90 cents. this is a name that typically trades 10% to 15% discount you

see in the s&p. these options are cheap. that's one of the reasons i'm not looking to put a put-on here. as carter says, if it drops down, he thinks it will, look to spread and press my shortcut. >> sometimes you get in just long options. volatility as cheap as they are, no reason to get cute and add a spread or add a leg to get a spread. this makes all the sense in the world. i don't see how this can maintain the level that's achieved. >> i'm generally bearish but i disagree on walmart. i'll tell you why. if you look at the 2007 and 2009 bear market, s&p went from 1570 to 66. it was actually up while the s&p was down 60%. i think what's moving it right now to new highsis the fact that you're seeing global recession. >> it had significant cash flow. they had buyback programs.

waltons owned most of the company by the time they were done. that isn't necessarily going to help prop it up here. >> i think people who fled, say, nordstrom to go to walmart are now going aback to nordstrom and names like that. >> stocks versus options one more time. when you short any stock you have limited upside and unlimited down side, whether walmart or any stock. it offers leverage and defines his risk to just $90. our changes to carter worth. send us an e-mail. optionsaction @cnbc.com. please check it out. here's what's coming up next. >> well, that should earn him a friend request. wait for more gains or just log out of the trade?

find out when options action returns. it's time for pump up the volume. the names that were heating up options sizzle index this week. need to lose some weight? no need to jog. this pharmaceutical company is trying to help you out. they have developed a new weight loss drug and they're just waiting to hear back from the fda. they made a hefty bet approval will bloat the share price. who is it? the answer when "options action" returns.

where were options traders pumping up the volume this week? arena pharmaceuticals. call volume five and a half times the average daily volume. >> all right. you just heard how arena pharmaceuticals how calls at heavy volume this week. we talked about this particular stock on the half-time show today. it has had a startling move. >> huge call volume. the company is inspecting an fda decision on an obesity drug. the thing is with niece binary

decisions options are insanely expensive. but i think they're going to get a good result. i think the way to play this is to buy a spread because you reduce the cost. in arena, i like buying the $11, $16 call spread, pay $1.50 for that. break even is $12.50. i make $3.50 above the august expiration. >> what do you think of the trade? >> you really need to use trades in these. do these types of things. oftentimes they will -- they really have to frame up the thesis, though. where could the stock go? you have to basically set the limits and time frames. it can be very tricky. outright options are not the best way. >> we look back on our winning trades. a couple weeks back dan the man nathan made a bullish trade on facebook. trades since have been on a tear.

make money and even save face. >> options action, it's how we make friends. risk less, make more. that's just what dan did with his bullish bet on facebook. dan was looking for a way to get money back on facebook shares. but buying more stock after that beating? not unless you have money like this guy. so to try to make some of his lost money back, he bought the strike call for $2.10. now, to make money, dan needs facebook stock to rise above the strike price by more than the cost of the trade or above $32.10. shelling out $2.10? >> right now this all seems like a big deal. >> that's because it is a big deal. and if we're going to get our money back, we're going to have to spend less. how can we do that? >> sold two of the august 34 calls. >> we like that. so to spend less dan sold not

one but two of the strike calls for a total of $2 and created his one by two call spread. and he did something else. he made profits come quicker. here's how. between the $2.10 he spent buying one call and the $2 selling the other two strike calls, he reduced the cost of his trade to a dime. now, instead of needing facebook to rise above $2.10. above $30.10. >> we think that's amazing. >> it is, mark. but there is a tradeoff. by selling the two calls, dan not only capped his profits to the difference between the strike of the call that he bought and the strikes of the two calls that he sold. but he could also have his facebook stock called away from him if shares rise to the $34 level. bye-bye facebook. bye-bye additional profits.

so, what has facebook done since the time of the trade? made friends aplenty, rising 20%. take profits now or hold out for more gains and risk having to sell his facebook stock for 34 bucks. options action's biggest fan. >> that's a really cool experience. >> has tuned into the show. and he wants to know one thing. what will dan do now? ♪ i wear my sunglasses at night ♪ >> let's see how much money was made. have you bought more shares of facebook you would look at a 20% gain. that's not bad. but dan's options trade cost only a dime and can be sold for 40 cents. that's four times your money. but it gets even better. if facebook settling below that $34 level, dan can make an additional $3.50. so lots of choices. so what's he going to do? that's the big question. >> i think the important thing here, though, is that due to

stock rehab. now you have to watch where you are. >> dan hit the road again. is it out fishing on lake george. he still took time to send us a card to tell us how to play the trade. greetings from lake george. while i'm not a fan of the company, its future products it was a low risk way to recoup some of the losses. the now the stock rallied about 15% and is at the midpoint of the ratio spread. if i were along the stock with no intent to sell i would leave it on. it found its footing. back to the lake. hugs and kisses, dan. >> you definitely need to let this thing go. you didn't want to buy more stock. you wanted to ratchet up to the short strike. leave the trade on. there's no doubt about it. especially ratio spreads to maximize value. >> you're going to bleed in a lot more money the next couple

of months if it stays between 30 and 34. >> do you believe the facebook story now? no. i don't think he does either. any news we get for facebook is bad. >> there was a whole big thing about the advertisers dumping on facebook. this past week, coca-cola and ford, two big names standing by their guy, if you will. >> thursday it was the only name on my screen in the green. facebook was up a little bit. i think you have to be more careful here. the goal was not to make a little bit of money. the goal was to get out of facebook. now you made a bunch of your money back. don't be a pig. >> if the stock everybody loved is now the stock that everybody hates. i don't get it. >> i would say at 607 pe, growth rates are only going to be 10% to 20% this year. you need to see an earnings cycle that shows it is sustainable. >> send us an e-mail. final call is next. >> what's your best option?

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take a look at this video here. apparently these bears were watching the top of the program or had early access to the chart for the crude oil and s&p. they apparently are duking it out. which bear is going to win? very interesting video there. time for the final thought. the last word from the options. scott, comment on the bears fighting? >> i want to see next week who wins. turmoil in europe. if buying protection is wrong, i don't want to be reut. >> sigma won't help ge buying a put spread. >> dan's trade is good. it's working right now. take both the options trade and the stock off if you start to see the stock reverse again. >> all right. looks like our time has expired. for more options action go to

optionsaction.cnbc.com. see you next friday at 5:00. i will see you just a little bit further down the set.