s. this is "options action". tonight big becomes in starbucks. how would you like to make four times your money in two months. it's a super trade that could right your portfolio and we'll show you how you can make money too. plus talk about a best buy. we have a trade on best buy that could pay you to buy best buy stock in hopes of a by out. why are option traders buying steel calls. the action begins now. >> live from the nasdaq market site in new york city times square. i'm melissa lee. we'll get to those trades in a

moment. we have to talk about the markets, ending with the best single day for stocks. eu summit giving a huge boost. how do you profit from this volatility. let's start off with the best skeptic and that would be dan, always the bear. here the price action was quite good. >> quite giddy. for them to close the quarter on the dead high of the day the way they did 2.5% the s&p, seems slightly artificial, seems slightly window dressing after a bad quarter. so to me i'm skeptical because it did feel a little bit artificial. when i looked up at my screen there were some warning signs. to me a lot of this was macro driven. what i saw was nike because of earnings, ford, jpmorgan. so to me that's the trade we're gaegt lot of color about that. >> i think that's an important point.

what was taking stocks up was hope. hope that the euros figured out their problem. hope we're starting to see the bottom in the housing prices. but this is -- we're far from out of the woods. if you see stocks go up on hope and down on facts i don't think that's a healthy recipe. >> the hope feels different in that merkel has changed her stance when it comes to the use of the bailout fund what comes to house we did get good data points from kay schiller and kb homes. this is not hope based on nothing. >> we haven't indeed seen the bottom of housing prices that's actually great news. i disagree with dan a little bit. i don't think what we saw today happened on nothing. i think there was great news. if you look at the last 35 or 40 minutes in the s&p, that was fantastic. mid-day you would have thought the s&p would have been stuck in the range for the rest of the day. it broke out to the upside.

one thing from the vix, option traders hate to be long volatility. but you have to go back to june and all the way back to the beginning of may to see the vix close this low. while it might come undone everybody feels good for a reason. >> there are some warning signs out there. it is interesting to note stocks rallied across the board on the hope europe would get better. two stories that are tied to international growth and a slow down specifically in europe and asia is nike ford they finished the day lower. even there's hope of macro solution on the horizon those two stocks are hit because of problems in those regions. >> that's the biggest point. last year we got bailed out in a lot of ways by this u.s. strength. right now in the past, in the last couple of years we were looking at emerging market strength. that was, these rallies that we had in these events this week and we sold off after all of

them. if you're looking at the rest of the world, of the global consumer, it's not likely to help bail us out not this summer. >> you don't need to see economic growth, you need to see higher employment. people are thinking this is the bottom of the house. the fed is telling you that's not the case. they wouldn't be sitting here saying we will try to keep rates low. you keep hearing people think now is the time to buy and see the order book fill up. a lot of people aren't getting loans. high cancellation rates. >> yesterday after the bell when the nike news crossed and you thought about the exposure to china you thought about other countries hit on the same concerns and starbucks came up but starbucks finished higher. are they vulnerable? >> when i was looking at the universe of potential names that are correlated to the high end consumer, starbucks is the first on the list. one of the things that got me

thinking about, nike and starbucks traded in lock step. that's been a recent divergent. they made all time highs in april and may and sold off. starbucks exposure has 30% exposure outside of the united states. they trade 28 times next year's earnings. if there's any holes in that argument for next year this stock will be revalued and going to go lower. you mentioned it closed up two plus percent. it was lagging most of the day. to me this is one where i think it can be very vulnerable and we get a sense for what global growth looks like. >> dan is cautious. buying a put spread. we use the structure a lot. this is a bearish strategy where you buy one put and buy another one to stretch your cost. you want it to fall.

that's where your profits capped. >> i looked out to august. it will catch their second quarter orca len car year second quarter earnings to me. it's not an earnings play. this is a macro play. earnings event may confirm what i'm thinking. i bought the august 50-45 put spread and it is a little bit out of the money but there's a couple of reasons why. i paid 85 cents for that when the stock was 53.10. i bought an august put for $1.30. i bought against it for 45 cents. my max gain is 4.15. i can make up to 4.15,. my max loss is 89 cents premium. i chose the 45 strike. not a high delta option. i'm selling it. i want also is the level, the break even level and i just want to make one last point. people didn't think nike could go to 85. it went to 85.

it's a well loved followed name. >> when stocks start falling down people never believe how far they can do. what's interesting, it actually is almost behaving like a single option. a lot of leverage in this trade. paying less than 20%. what's happening here you make a cheap bet. you're defining the spots where you're willing to get back into it. it looks like one of the best ways to make a bearish bet. >> we have to pay attention, it's almost 6% out of the money so you have to take those two and weigh those two against each other. also it's interesting to point out, i disagree with dan a little bit. i think that what starbucks is doing, most of their new initiatives are here at home. what they are doing overseas is opening 40 stores across all of india. that's what they are doing internationally. 40 starbucks stores in my

neighborhood alone. >> the stock can go down and the spread will make money. you don't have to see the stock go to $45 for this thing to appreciate. if the stock starts dropping this thing will appreciate. that's part of the leverage i was talking b-like a single option. if you're looking at it from an experation perspective that's true. >> i would just say one thing. one of the things i took away from the nike earnings they are spending more to make more money overseas. those stores or those regions are underperforming, going hit margins and the stock willing be revalued. >> they have done a lot of things at starbucks. lattes, and others. what they don't have is stocks versus option. think starbucks follow nike.

if you short the stock you could face unlimited losses. let's move on to our next trade best buy shares surging 10% this week alone on reports that the company's founder is facing a management led buy out. could battered shares of best buy be your best buy for the rest the year? let's call to the charts for the only one carter. >> reporter: let's look at the charts and see what we can figure out. i got a couple. two year chart. daily. and we're going to put this in so bad that it's good category. this thing is a persistent down trend, not stopping. let's put that in a little bit of a time perspective. let's go the longer term chart. with we are now, we've gone back to the loss of '09 when the world was ending, lehman going under, we found those loss and at 21 we think this is where it ricochets. i want to look at a few

valuation charts. this is priced earning and record low five times. next one is price to cash flow, three times. this is 20 year chart. lowest it's ever been. sales. point one. this company continues to put up the numbers despite amazon and the final chart let's look at price per share versus earnings per share going back since the early '90s. this made a quarterlile result, record trailing 12 months, share price is saying something different. which has it right. we think at this point this selloff has discounted too much and ready for a rebound. >> the stock looks good. fundamentally is the only catalyst on the horizon the management led buy out because that's a terrible reason, to you know, create a thesis around a stock. >> what we need to look at is evidence of weakening fundamentals and we haven't seen that. talk about a company that's

generating $1.7 billion a year in cash flow. that's 22% pre-cash flow yield. if you can buy an asset, get that kind of free cash flow asset. it's not coming down. net cash on the balance sheet, not a lot of debt. the guy already owns a significant portion of the stock so that's certainly a reason why you might think you're bottoming out. i could see them saying we're not going to do a buy out. we'll do what we've already done which is initiate more buy backs. what has that done in the past? everybody said the worst possible things for the fundamentals for this story they bid the stock. they were buying it at 24. i don't see any reason why they wouldn't buy it here. >> you're bullish along with carter. let's open the playbook and review the structure. buy one call and sell a put against it to finance the cost of the trade, you want the stock to trade above the call price.

so, mike walk us through this trade. >> the one we're looking at here, 184 risk reversal, you'll sell the 18 put collect $1.75 for that and use the proceeds to help finance the call. net trade collect a quarter. if you own the stock you would get a 34 cent dividend. you're buying the stock at 21 pucks rather than force it to buy it 15%. you get to participate to the upside. one of the things you're weighing here, i'm catching the falling knife. the issue is that volume is pretty high in the stock. that's a challenge. if they come up with a buy out the premiums will get offset. we're increasing risk by selling that put. >> melissa nailed it. if your thesis is just because of a management led buy out. we talk about probabilities. go back and look at all the times existing owner of a

company suggested they may buy their asset back because it's too cheap and it happened, it probably is not a high success rate. >> we saw call volume in this name higher than average for the very reasons we talked about. the thing is while i love risk reversals i hate this name. i hate it even though they have this magical plan. nobody buys anything there. the problem is if i give the stock put to me i don't want to own it there. i look to puke it. i'm not a fan of selling puts in it. >> the company, you act as if he hasn't use this cash flow to purchase shares and they have. if you own a substantial portion of a company like the walton family owns walmart and he owns best buy if you use cash flow to buy back shares you are buying the company. slowly and steadily with the company's own cash flow. now basically what he's suggesting if i'm not going to buy it back fast enough maybe i can buy the whole thing.

>> best buy goes down slower. >> that means that this is more of a call option. >> let's hit the playbook. i want to buy best buy stock moved by carter's present jays. that will cost you 21 bucks a share. the option pace him a 25 cent credit in worse case scenario he could be forced to buy best buy stock for 17.75. carter always good to see you. stay cool in this heat. got a question, send us an e-mail. we also post trade recaps there too so check it out. here's what's coming up next. >> just short it. dan's bear iish on stock. find out when "options action" returns. time for pump up the volume.

this deal company's roots reach back over 110 years. friends from back then call it the american rolling mill company. these days they are well-known for making roadside guardrails which can come in handy when your driving gets slope chip. they drove up the call volume betting the stock is riding high the company shares are still a steel. who is it? when "options action" returns.

where are option traders pumple up the volume. ak steel. call volume was eight times over the day volume. welcome back. you just heard how active ak steel was. the stock was lower. >> it was lower today but done pretty well. deutsche bank had good things to say about it. >> time now for the upside call. we mentioned nike's tough day. dan had a simple trade on the apparel giant. he made three times his money and here's how. >> "options action" is how we just do it. risk less so we can make more. that's what dan did. he bought shares of nike thinking it would get knocked by europe. >> there was a report commenting on weakening shoe sales or trends in china and the u.s. and

weakening apparel trends in western europe. >> but shorting the stock might as well go one on one with this guy. so to define his risk bought the july 97.5 stock put. he needs nike to fall below that price by more than 2.60 he spent at the ride or below $94.90 by july expiration. 2.60? we don't have multimillion dollar shoe contract. spend less. >> i sold one of the july puts. >> to reduce his cost he sold the july 92.5 put for $1.35 and created his put spread. more importantly he made making money easier and here's how. between the 2.60 he spent buying the one put and 1.35 collecting the other he got 1.25 and now instead of needing nike to fall below 94.90 he can see profits

at 96.25. hold the applause. because there is a trade off. by selling that put dan now capped his gains to the difference between the strike of the put he bought and the strike of the put he sold and since the time. trade nike shares got nailed to the tune of 12% making dan a winner. now athletes across the globe are tuned into the show and they only have one question. what will dan do now. in case you didn't know, the show is hugely popular in the world of sports. how do you short it? i don't think anybody believes me. if you short it you would have made 13%. dan's put spread cost 25 and could be sold for more than three times that amount. dan before we get your next move, you put a similar trade on for starbucks. you think nike will go lower? >> nike trade ahead of the starbucks thing.

i rather find things that broken the way nike did. any kae trade 85 this morning, probably a decent buy. i want closed much higher. people love the name. they will get back in front. >> there's an interesting couple of trades this week. one was the china trade which fell apart with nike's warning and a downgrade from citi, downgrading the higher end retailers. so there was a downgrade around the board for these retailers that rely on higher end consumers, macy's of the world. tiffany saw a 52 week low. do you now find the next one to fall? >> i think it's interesting you bring some of these names up. macy is part of that henry group, high earner not rich yet as compared to people who have a great deal of money. those who have a great deal of wealth feel the market

volatility. i think both are probably week right now. nobody will feel comfortable running into september. >> no. tiffany is disappointing but actually costco has done really, really well lawsuit tely. 52 week high. they actually have a demo brafices very similbrafic -- demographic similar to these names. >> is this my trade. >> today -- >> rather talk about a place where you can buy toilet paper by the ton. >> listen. this is an portrayeding point. yesterday the stock had continued to be weak into this earnings event. i took half off for a double and today on the news i took it all off for a triple. i mitigated some of that risk. >> all right. thanks, dan for reminding us

what we're here for. a remind ir, if you want updates on our trade follow us on twitter as cnbc @options and dan updates his trades @reversal. final call on the trades right after this.

having trouble winning rock, paper scissors. there's a mechanical arm to win rock, paper and scissors 100% of the time. you got to hand to it the japanese. this robot is rock solid. that's what we call optional viewing. obviously the machine hasn't played mike. time for the final call, scott. >> it cheats. whatnot to do when you're selling a covered call. >> i want to press consumer discretionary. >> i is like starbucks. >> our time has expired. for more go to our website.

we'll see you back here next friday at 5:00. "money in motion" is up next right after this break.