>> this is "options action". google is teaming up for an auction trade. plus how would you like to make five times your money in morgan stanley in just one month? it ain't no bank job. it's the options trade ahead and he'll show you how you can make money. game on why are all those option traders taking take two calls. the action begins now. >> live from the nasdaq market site, these are the traders here in times square. who says friday the 13 is an unlucky date?

helping stocks turn positive on the week. huge week for earnings coming up. do you believe in this rally? let's give the money and find out. we saw a 200 point move in the dow. a big one but it was on light volume. we discounted it. >> i think we absolutely should discount them. i think we should discount that jpmorgan's earnings. what does everybody think jpmorgan's earnings would have been this quarter? would it have been a number pretty close to what we got anyway? what a joke. as far as the industrials, the stocks that have been performing well, caterpillar is up a little bit today. it's down 30% from its highs. the stocks going up are the defensive names. this is where people run and hide. is this a great rally. those are the stocks that have been holding the market up? no way. >> smart investors realize what mike is talk about. they don't view this as a

healthy rally. stocks that were up to all time highs, walmart, kimberly-clark, these are toilet paper and cereal stocks. that's what's in a bull market. >> mike doesn't like jpmorgan. wells fargo came out today and it is probably a better barometer of the financial sector. we can look at everything else in the world that matters. one thing i'll look at is yum. that's considered a proxy year for china. we've been terrified by china. china has 7% growth. something we would kill for. for china it's considered to be not that great. one final thing, vix got killed today as you would expect when the s&p is up 22 on a friday. last july the vix was in the low 15. don't think it can't go lower. that doesn't mean you sell it but it can go lower from here.

>> i want to go back to the financials. i understand what you're saying. i'll take the other say of this. what they said about commercial loan growth and mortgage originalation, those are positives. at the same time we got a china gdp number that sets up for the next round of stimulus. >> i don't really buy a lot of what is going on in china, either. that economy seems like a tremendously risky situation. i think there is a lot of house of cards stuff going on there. you do have a good point on the loan growth mortgage origination, home builders have been on an absolute terror. we're talking stocks up two or three hundred percent. so, is that a positive sign. it's a positive sign. someone fluttering an eyelash. >> to mike's point. i think what's is interesting is the wells fargo report i view as genuine. the jpmorgan report i don't view

as genuine. making a strong earnings beat on an investment bank. i agree wholeheartedly. i think the commercial banking side is very strong. wells fargo speaks to that. investment banking business is half of jpmorgan's business as a whole and that is an area that will be under pressure in the future. >> let's look specifically at next week's roster. nearly 20% of the s&p 500 will be reporting. 0 lots out next week. you're looking at morgan stanley on the heels of jpmorgan. >> absolutely not. exactly to the point that we're just talking about, the investment banking business, dimon said that it was weak. all capital market businesses,

he also said that the third quarter started out like the second quarter. europe and asia specifically have been weak. those are the growth markets. morgan stanley has been very closely correlated to the european banks. interestingly enough today. if you look at a five year chart you can see right here, europe and morgan stanley are one to one correlated. morgan stanley is having systemic risk. >> it's obvious from the chart and that's not we use the structure a lot it's. this is a bear strategy. that's where you make the most money. that is where your profits are capped. walk us through the trade. >> so, today when morgan stanley was around $14, i bought the

13.11 put spread in august. what am i doing here? i bought one of the august 13 puts for 40 cents. i sold one for 10 cents. my maximum risk is 30 cents. i start to make money when the stock is below 1270. my maximum gain $1.75. great risk reward. my max gain i certainly wouldn't short the stock. i think one way to play the theme of investment banking, just like we spoke from the jpmorgan report is to buy a put spread. >> the investment banking business is really in the dumps and i really wish it wasn't. we're all working in finance and wishing things were better. it's not a good environment and not a good environment for their business. option prices to my eye, your comments on the vix could go

lower but i don't think they should. i think options are cheap. people should be insuring that your positions. it makes all the sense in the world. >> in general, people should be insuring their positions. like having life insurance, if you don't collect on your life insurance, are you really going to complain that much? you're only risking a 15% of the width of the spread. i'm not a big fan. you don't have the wind at your back given what we saw from wells fargo and jpmorgan. >> i would think with the gain today on the back of jpmorgan that being bearish is a safer bet than it was. >> you are certainly going to put this on better than you could friday of last week. >> one point to add, morgan stanley five weeks ago was at

$12. had a significant rally to this point. >> a lot of ground was covered on that j.p. morgan two hour call. want to short the other house of morgan, that carries unlimited risk stocks. they can go up forever. this is put spread risks that could be worth as much as a buck 70. more than five times your money. not bad. let's move on. $700. 700. that's where google is going in the next three months. option prices are implying a 6% move on this event. let's find out why. call to the charge with carter braxton worth. carter? >> sure, let's have a look at the charts. i have three all the same time frame. so this is a five year chart. and google tops with the market 7 and 750. bottoms of the market at 250. nice steady up trend. three year bull '09 to 2012. in principle, what is important is take a look at the next drawing.

same five year chart. as you work higher and higher, you also have a flattened top which means there is tension building here at the 600 plus or minus level. the presumption is each time you probe it you are removing more and more supply. take a look at the third and important chart. same five year chart. on an annual basis. in '07, when they were at all time highs, they made $19.49. in '08, 23.20, 2010, 36.04. so this is called pe compression. yes, at some point, it gets resolved. the presumption is the resolution is up. we're going long here. it will be powerful. >> powerful rebound. mike, do you agree? >> i do agree. i was reflecting earlier, this stock is exceptionally cheap.

if you take out the $50 billion they have in cash, this thing is trading less than ten times forward estimates. that's exceptionally cheap. especially for a stock that's grown both in earnings and revenues. they own their space. one of if reasons they have this business is nobody else really competes with them. i don't think anybody else is going to. they have many businesses they are looking at ways to monetize. at some point we'll see like the droid phones and not really a driver of revenues right now. it has a lot of potential to be. i certainly do like the stock. >> so mike is bullish and buying a call. do you think options are tricky, this is about as simple as it gets. when you buy a call you want the stock to rise the stock of the call. that's where you see profits. that's all it takes. anything below you will see losses by expiration. what are you doing? >> i'm looking at the september 5.75 calls. looking to pay 29.50 for those.

there's a couple of reasons why i'm using a strategy. the options market is implying a lower move. this is costing me give or take about 5% of the stock price. you may have opportunities to spread this into the future. a $29.50 up move seems like a lot. in the scheme of what google can and has done in the past, it is not that much. >> an interesting point for google. all of these things line up. they are looking to get into new businesses which are largely commodity businesses where they can face margin compression. and stiff competition from the likes of apple. >> we have had various businesses exactly. more than that, facebook, i think showed us that people were very nervous about the weakness in display advertising which is their core business. that's their go-to.

google is a cyclical business. advertising is a cyclical business. i like the fact that it's an options trade and not a stock trade. i do think that google options are too cheap. >> one of the most profitable trades is mike suggesting buying an outright call on google a couple of years ago. i do think it is interesting. as google gets into the new businesses, the surprises are going to come in. you will not have as big an earnings surprise. especially as they get more diversified. that's a good thing. for somebody buying a call you're begging for an earnings surprise. >> no question. very good point. their efforts to get into anything hardware is flat. that doesn't take away from the fact they have consistent performance regardless. and that is really what we're buying here. >> okay. one more time on the stocks versus option.

how about buying 100 shares of google, almost $60,000. mike's call purchase costs just under $3,000, offers significant leverage to the upside. our thanks as always. got a question out there? the address is options action at cnbc.com. we will answer it on the show. we do love to get e-mails to don't be shy. also find a lot of educational material there so check it out. here is what is coming up next. >> talk about a mishap. last week a bearish trade on jpmorgan, but the stock soared on earnings. what's his plan? find out when "options action" returns. time for pump up the volume, names that were heating up this week. controller hit video games with titles like max pain and grand theft auto, that must have stocking stuffer. option trader fired up the call,

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seven times the daily value. >> i want to go to scott. scott? >> melissa, russel was just in court after having quite a week. he was wearing -- looking somewhat haggard wearing a blue polo shirt and jeans. founder of pfgbest had tried to commit suicide earlier this week. his firm filed for bankruptcy on tuesday and it's clear that the scandal is just beginning. prosecutors saying they plan to seek additional charges in addition to the charge and criminal complaint of lining to -- lying to regulators. they plan to argue that he is a flight risk. a hearing is scheduled for that on wednesday. at which time he hopes to get his defense attorney out here to

iowa to potentially argue for bail. but a damning suicide note that sounds like a confession released in the criminal complaint where he said i guess my ego was too big to admit failure so i cheated. russel in custody here in iowa. >> thank you very much. want to move on. time to get called out where we look at our losing trade. last week, a bearish trade on jpmorgan. he could still make money and here is why. on options action, it's now we make out like bandits. risk less so you can make more. that's what he tried to do with jpmorgan. thought jpmorgan was in for a whale of an earnings disappointment. >> earnings for jpmorgan are up 25%. >> shorting the stock -- >> think of your families.

don't risk your life. don't try and be a hero. >> let's stick to the options. to make a bearish trade, the august 35 strike for $1.15. to keep all of that money, he needs them to stay below $35. above $35, profits would trail off. he won't see losses until jpmorgan rises above that call strike than the $1.15 he took in. meaning that he can make money whether jpmorgan goes up, down or nowhere at all. >> sorry. is this a robbery? >> not quite. there is a trade off. if jpmorgan soft trades above $36.15, he will be on the hook for infinite losses. >> wow. >> you've blown it man. >> so to limit his risk, he bought the august strike call

and completed his bear call spread and here is how it makes money. between the $1.15 he collected selling the more expensive lower strike call and the 50 cents he spent buying the cheaper higher strike called pocketed 65 cents. in order to keep all of it, he needs jpmorgan stock to stay below $35 by august expiration. above that, losses kick in, but they limited to the difference of the strike of the call that he sold and the strike of the call that he bought minus the credit. and since the time of the trade, shares have rallied 6%, making this trade a loser. now options actions biggest fan just want to know one thing. what will he do now? >> before we answer this, had you shorted last week you would have lost about $200. ennis collected $60 on the sale and if he closed it out today he

would have a loss of about $40. here is where it gets interesting. if stock can stay below $35, he can keep all of the money. he can be wrong on the direction but still right on the money. this is why some traders like to be short premium. >> in this case, going into the trade i actually was not so confident that jpmorgan was going to go down a lot. but i was confident it wasn't going to go above 36. i still like the trade, i'm not touching it. time is on your side at this point. >> that's why it goes hand in hand. a general belief that financials remember destined to go lower in the short term. >> that's right. you don't get out of your trades immediately when something does not work out. you have to look at the trade. you still believe in it. this is something that time is working for you.

if you're still bearish on it, then you stick with it. >> volatility got crushed. earnings came out. the name is going higher. i'm getting out. you've done pretty well if you shorted the stock. >> i am curious. next week is a big week for earnings. but it's also ben bernanke testifying on the hill. will what he says influence whether you keep the trade? i would imagine that could be a huge possible catalyst good for the stock. >> i'm relatively bearish. i think we have a lot of recessionnary forces. i think a month from now we'll see stocks lower than where they are now, jpmorgan included. >> coming up next, the final word from the options pits.

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no word on whether goatee will enter upcoming surfing competitions. we're sure he will be the sentimental favorite in any competitions and that's what we call optional viewing. truly optional. >> wow. >> all right. time now for the final call. the last word from the options pit. scott kick it off. >> i like mike's google trade but spread it out because that's a lot of dough to lay out. >> financials were not as pull bullish as the price action showed today. they are going lower next month. >> if you are going make a bullish bet, a name like google is the way to go. >> for more options actions, go to our website. see you back here next friday. in the meantime don't go anywhere. moneyin motion is up after this break.

like a high-speed train.

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