bye-bye. this is "options action" tochlt night week end at tiffany's. they're teaming up for a trade to make six times your money in just three months. it ain't in any blue box, is it's their options trade on the retailer and they'll show you how to make money, too. dan nathan has an options strategy on yum brands that can make you seven times your money by october. he'll break it down. why are the options traders hunting for options calls? the action begins right now. live from the nasdaq markets, i'm melissa lee. these are the traders here on

this desk. the only thing hotter than the weather here is the stock market. the dow hitting lows not seen since 2007. how much longer can this rally run? let's get in the money and find out. we start with a desk skeptic. he is the most skeptical on the desk. everybody is skeptical. home builders, oil stocks and more. what's wrong with that, dan? >> listen, everything is great. to be a skeptic of this market is a bit exhausting. i'm pretty much ready to throw my hands in the air. you mentioned things that are acting very well. you know, when i look at the s&p 500 and i look at the concentration of the top ten names, they make 20% of the weighting of the entire index, ten names. a small amount of stocks driving a great bit of performance. all are at major lows relative to where the s&p was.

if you look at the highs back in 2007, the readings were much, much higher. to me, the rally is getting narrower and narrower. >> to some extent, past rallies, haven't they also been led by a handful of stocks? i mean, yes, we're used to it being financials, technology and energy, but so what. it's consumer staples this time. it's utilities. >> utilities, there is a sector i would sell outright. some of the telecom companies like verizon. i can't understand why someone wants to own a duke energy trading at 20 times earnings and zero growth potential. the only reason people plowed into the stocks is they served as an inflation adjusted bond. in a really distressed equity market.

i think the other thing that really worries me is that you see the vix as very long term lows right here. you take a look at the cost of an s&p straddle, in both treks out to the end of september. those kinds of things are an implied correlation. all the single stocks came down. for the first four hours of today, the only thing i saw were options sellers. nobody is concerned about anything. i think they are asleep. >> i think part of that is because it's a friday in august. dan said that being a permanent bear has been exhausting. it has also been expensive. i think the names we talked about are some of the names we hoped to see making 52-week highs. home builders, energy and tech, those are the names you want to see do well. the vix have gotten killed. it's been pulled down by the twin anchors of the calendar,

but also there hasn't been a lot of realized volatility which is what you get when you buy options. i think what's interesting, the vixx was lower on monday, and that only happens twice a year. it's gotten killed. it's because of august and it's going to come unwound when everybody comes back from vacation in september. >> people talked earlier this year about a performance chase and how much cash there was deployed into the market. those cash balances have dwindled materially. so that little put that you have to equity prices has declined significantly. we're close to all-time lows essentially in the amount of cash on mutual fund balance funds making acquisitions for stocks. those are the kind of things, all the stuff you have to worry about that can cause tracks to turn into something more severe. >> if you're worried about the stock market and where it goes from here, i imagine you're worried about consumer discretionary stocks in particular. >> mike will talk about tiffany's in a bit. a lot of the stocks have already cracked and starting to come

back. i want to focus on a name much lower down the food chain and that's yum brands. i'm concerned about the u.s. consumer. when you think about yum, they said to us just a few weeks ago everything is okay. let me tell you something very interesting. last week mcdonald's had sales down in all three major regions, the u.s., europe and asia for the first time since 2004. and chipotle, 100% domestically focused said they're starting to feel the pinch from consumer spending in the u.s. here is a name we haven't mentioned, china, yum gets 43% of sales from china. the chinese market is telling us something, the shanghai is at three-year lows. the data does not get any better out of china. to me i want to focus on this name in the near term. i think we'll see some kinks in the armor. >> of course, dan is there. he's buying the put spread tonight. we use the strategy a lot. we've been on hiatus two weeks.

it's a good idea to open the playbook and how it works. you buy one put and sell a lower one. how do you make money? you want this stock to fall to the short put strike. that's where your profits are capped. dan, walk us through the trade. >> like i said, i want to buy a put spread in october. it's going to get two, three earnings. mcdonald's cannot get out of its own way on a technical basis. i wanted to look down a little bit when yum was trading 6630, i bought the 62 half for $1.10. i bought one of the october 62 half puts for $1.30. sold one at 30 cents. max risk is $1.10. i make money between 6140 and 55. i can make up to 640 on that. my max gain is at 55 or lower. i can lose up to 110 between 6140 and 62 half. and i lose the entire $1.10.

>> do you buy the notion that the shanghai is telling us something about the chinese consumer and his or her willingness to buy chicken legs and pizza hut? >> yes, i do. first of all, whenever you have rapidly growing economies, even if you're a believer in the chinese story which i don't happen to be, even if you were, you have to recognize it's going to be a lumpy process and the data we're getting is suggests things are not that great. you have to factor that into your expectations. the other thing i would say, it's interesting because we're probably going to talk about strategies similar to the one dan has here. we're talking about how low volatility is. that doesn't mean that put spreads don't make much sense. in these types of environments, it can come in a great deal. the out of the money puts can have a better bid to them and that works better. >> i think the price action in oil tells you more about china.

maybe it means things in china aren't as bad as they appear. this one does have to break at 8% before you get to that first strike. >> i want to ask you about using october specifically, dan. that seems to be like perhaps not enough time to let this trade work out in that in this time period you might expect a round of central bank easing from either here in united states or in china. that will lift all votes. >> that's a great point. i'm not expecting to here. i'm expected to hear the ecb stuff. some things indicate they may wait a little bit. they've lowered bank reserve ratios a lot since last fall. to me, if nothing happens, october may be the perfect time. >> what matters is it catches the next quarter's earnings. >> let's button this trade up with stocks verses options. yum is the financial equivalent of food poisoning, shorting stock carries unlimited risk. i forgot how mel dramatic we are on the show.

risk $110 that is the culinary genius of options. moving on. a key test for the high end consumer will come next week with the release of tiffany's. a 5% move on earnings. that is less than the historical average but a big move nonetheless. the question, of course, is in what direction. let's get answers. call to the charts with a man who harbors a crush on holly go lightly, talking about carton braxton worth of oppenheimer. >> three charts, all five-year time frames. this is tiffany's from the '09 low, 15 to 85, a well defined up trend. the weakness of this past eight to ten months we've broken trend. take a look at the second chart. the same five-year chart. you can draw it this way. all the hallmarks, bullish to bearish reversal. what makes it interesting as a

sale here, let's look at the third chart is the recent strength. meaning the stock has bounced from about 50 to 61 at today's close since the june low with the market bounce. this bounce puts it against the down trend line that's been in effect since it topped out. think it's right to sell into this strength in anticipation of some sort of news-related drop. >> all right. sell into the strengths of the move looks like it would be downward. would you agree fundamentally mike? >> i think i would. it is trading at a slight premium. a lot of people looked at this name as being more immune because they appeal to higher end consumers who tend not to have the same lumps and bumps that the rest of us might. one of the things i would point out is there's a couple interesting dynamics here. some of their costs relative to whether they've been able to sell things have been going up. they have seen some march john compression p pregs. their highest items seem to be silver, the lower priced items

they sell. finally, a licensing deal with per rhettity. back in may they talked about the fact that they were having trouble renegotiating it. that represents 10% of tiffany's net sales and is probably the highest margin business they're doing. all of those things do put a little pressure on them. >> that's the only reason that dan goes into tiffany, right? mike is obviously bear issuesing a one by two put spread. we don't use this often. let's review the vuk tour. in the strategy you buy one put, then offset the cost by selling two lower strike puts of the same expiration. you want the stock to go just above the strike of the puts that you're short. since you're short more puts in your long, you may have to buy that stock at the low strike price. mike, what's the trade? >> i'm looking at buying the november 60 puts, paying $3.40 and selling the 52 1/2 strike puts for $1.10, collecting $2.20. net debit is $1.20. i need it to run through my long

strike by at least that much. i make the most profit with the stock down after which my profits trail off a little bit. as you pointed out, if it declines too much more, i could potentially own the stock at a net price of $46. that's pretty significant, more than a 25% discount to where we are right now. >> in this sort of environment, do you want to be short that extra put? >> to me, here is one thing, i can't agree with these guys more about everything they just said. they didn't mention that 35% of the sales came from asia. china is a big growth area for them. i can't agree more. i do not want to sell two puts. i like the structure, the cost. the risk/reward makes sense here. >> marginal -- i absolutely agree. melissa made a great point talking about the ecb and other monetary policy being essentially a put to the market. it was something we were talking about on the desk today. maybe one of the reasons volatility is as low as it is,

who wants to go buy insurance when the central banks are providing you some for nothing. that combined with the fact that we haven't seen that kind of significant decline in revenues for tiffany's is one of the things that will protect it from an accelerated decline. >> a couple things about this. in general you make the most money when the market goes to your short strike. that's exactly what happens here. when we talk about how put spreads can make the math work for you, it works in your favor. the math is not working for you here. it's your indentured servant. i don't know how you don't want to do something like this. it has to drop so far before you have to get the stock brought to you that you want to buy it in a discount. >> they certainly have lots of beautiful items, great jewelry, underrated hand bag, nice shades. you won't find this in any blue box out there. that is stocks verses options. shorting tiffany's or any stocks carries unlimited risk. mike's spread risks $120. he could be forced to buy tiffany's stock for $52.50.

got a question out there? send us an e-mail, options action@cnbc.com. we'll answer it right after the show. we post trade updates there as well. you want to check it out. here is what's coming up next. this trade could use some social work. last month mike made a bearish prediction on linkedin. with expiration just around the corner, will he hold out for gains or log out. find out when options action returns. time for pump up the volume. can you feel the chemistry? this company makes chemicals and chemical formulations. these days it feels political founded by father of republican primary contender. it could be bought by the company romney used to run. option traders created a reaction in the calls this week in the hopes they'll be left to make the acquisition. who is it?

the answer when options action returns. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.

>> where were options traders pumping up the volume. doesn't man. '6 call volume was 13 times the average daily volume. welcome back. time to do something we haven't done for quite some time and that is get called out.

a couple weeks back mike made a berish trade on inked in. he's not losing out on much money and here is why. >> on "options action" just because you risk less doesn't mean you'll always make more. that's what happened with mike's bearish trade on linkedin. s he couldn't believe how expensive trades were. >> it's trading at a valuation of $11 billion. >> but shorting the stock? this ain't facebook and shorting linked in could put you out a lot of cash. so to define his risk, mike bought the september stock put. then mike needs the stock to fall below that put strike price by more the cost of the trade or below 89.10 by september expiration.

mike, let's find a way to do this for less. >> sell the 75 for $1.30. >> the mike then sold the september 75 strike put for $1.30 and created his put spread. he did something even better. he made profits come sooner. all it took was simple math. how is that? well, between the $5. 0 he spent buying one put and the $10.30 he collect bipd selling the oerks he cut his costs to just $4.60. now instead of needing linkedin shares to fall, he can make profits if they fall below $95 by more than the $4.60 he spent on the trade or below $90.40 by september expiration. but there is a tradeoff. by selling that put, mike has capped his gains to the difference between the strike of the put he bought and the strike of the put that he sold. good thing he did cut those costs. since the time of the trade,

linkedin shares are flat. making this trade a loser. now "options action" fans across the web are linking in and they want to know the same thing. what will mike do now? before we answer that, time for options verses options where we drill down on why we talk about these strategies. had mike bought the 95 strike put, he would have lost more than 60% of his money. by using a spread he was able to reduce his costs. if he were to close out the trade right now, he would be looking at a loss of 50%. still not great, but not as bad. >> linkedin is a volatile strike. what do you do? >> we've obviously expressed real skepticism here. the thing about the lower strike put, it's offered around a dime. we definitely want to cover that downside put. as for the 95, i think there's still a chance. we've still got time until september expiration. going the lien to the short side

here. >> funny we're calling mike out. i think this thing has a great chance. you have to cover the downside put. let me tell you something, this company manages their lock p expiration well. they did a secondary when the stock is up. if i were these guys, i would be doing another secondary. i would be raising some cash because their equity currency is funny money. there's going to come a time when they'll need cash on the balance sheet. >> that would be a great way for them to torpedo their strike price. >> if they're looking around and looking at every internet ipo that's gotten destroyed, i would want to protect my balance sheet. >> you mentioned managing very well. on thursday it hit a new low and hit a new low in today's session touching $19 even intraday. dan, is there any point at which you should would say the stock is a buy. >> one specific thing and that's it. 400 million more shares coming in november.

they're going to be sold again. to me i think there's one thing to get this stock higher, a merger with twitter. these guys have $10 billion on their balance sheet. they should move mountains. >> if you're convinced it's going to move lower into the next big expiration -- this is a baby expiration essentially. would you put a put spread on? >> on a balance. i think you've got to wait. >> the other thing, certainly i wouldn't mind selling upside calls. a lot of volatility on the stocks. where would i buy the stock? i don't know, about 20 to 25 times earnings which is a significant discount to where it is trading right now. >> that's an interesting point. they make money. >> speaking of social media, this is a reminder as we head to break. if you want updates on our trades, follow us on twitter. dan, of course, posts regular updates on twitter. the final call right after this.

and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.

it's christmas in august. the world famous rockettes

kicked off the season early. the rockettes showed off a display of costumes worn throughout the years. santa was there as well. the celebration took over new york's 6th avenue. a little early to be thinking about that in my view. but whatever. time for final call. scott. >> this week's web ex-draw is about jc penney. certainly a takeover story and the way you want to play the upside and get back to school and the holidays. >> dan nathan. >> the market is real complacent. to me i want to look to something where they're telling us something. that is in china. i like mike's tiffany's. i'm going to press the shorts. >> mike. >> definitely inclined to make bearish bets and take advantage of low options premiums. if you can't find a place to put that into your portfolio on a stock-specific basis it's time to look for buying puts in ibm. the options are so cheap, you'll be glad you did. >> our time is has expired.

go to our website, we'll see you next friday. "money in motion" is up right after this. and you don't want to miss it with thinkorswim by td ameritrade. you get knock-your-socks-off tools, simple one-click orders, real-time paper trading to hone your skills, plus anytime you need it support. ♪ stocks, options, futures, and forex. get your trading on track. thinkorswim by td ameritrade. trade commission free for 60 days, plus get up to $600 when you open an account.