this is "options action." tonight, gas' pain, your gain. a gasoline spike has sent refiners' stock soaring. chouw and carter are teaming up for a trade that could get you on valero for under a buck. they'll break it down. plus, talk about breaking the bank. dan nathan does an option trade on jpmorgan earnings that can turn time into money. it's a whale of an opportunity, and he'll show you why. and why were all those options traders joining the mile high club? scott nations reveals the activity in delta calls. the action begins right now. live from the nasdaq market site, the world's largest equity options exchange, i'm melissa

lee. these are the traders here in times square and in the lovely city of los angeles. the dow closing now for the third straight day and reports five-year highs, but the make-or-break moment is here. earning season is upon us, so the question is do you stay long into next week? let's get into money right now and find out. before we do that, though, we've got to talk about apple. it looks like there are signs of a breakdown here with apple breaking below the 50-day moving average, dan, moving lower by 2% on a day where the markets are basically flat. and on top of it, we have the foxconn strike. >> yes. so that headline came out that one of the factories in china where they make the iphone 5, the stock took a leg down. i mean maybe half a percent, three quarters of a percent. it was weak all day. >> right. >> but here's the thing. i think it feels like the momentum has kind of come out of the thing right here. we had this buildup into the iphone 5 release, and then obviously the units were a little disappointing. so here you have the thing on a technical basis, 650 is this huge, huge level here. it was prior resistance. and so, you know, remember here, this thing makes up a disproportionate amount of the major indices here, and it's making up a lot of performance for a lot of portfolio managers or individual investors. so at the end of the day, this thing has worked really well. it's up 60%.

so you have a lot of people just taking some profits here into what is likely going to be a disappointing fiscal q4. >> mike khouw, you know, the apple bulls out there -- and there are plenty of them -- will point to, of course, the sellout demand for iphone 5s, but at the same time, they'll also point to the historical pattern that we've harped on so much, the runup into the product launch and the selloff afterward, the sort of pullback in the stock. do you think that this time it could be different? >> well, i think what's interesting is that we actually had a little bit of a delay, didn't we, in the pullback this time. it actually sort of hung in there a little bit longer than normal. here's the thing about apple. we say it again and again. they have to deliver every six months new products that are going to knock it out of the park. you know, i look at this thing and i see very high margins relative to their accounts, particularly samsung at about 42% growth versus 26%. and every single time i look at this thing, i think, well, all it takes is something to go wrong either on the margin side or the growth side.

you know, look at all the ones that have come before, all of the handset makers that have come before. save samsung and apple, all of them had their run and lost it. so for me, you know, i don't see any reason to start chasing it here. >> sounds like mike khouw is thinking of research in motion, which seems to me unthinkable given apple's tremendous run and the 55% margins that can be found on the iphone 5. >> that's absolutely right, but part of the problem with the iphone 5 is -- and dan touched on this -- that they can't fulfill the demand. and we've seen this before. but i think it's different this time in that the screen technology in the iphone 5 is different, and they're not able to fulfill all the demand that they would like to. i do think that it is different this time, also, for another reason. apple's never really had competition before, and in the form of samsung and google, i think they have a real competitor now. >> all right. but the bottom line here, dan, for apple is it has to hold 650, or are you going to wait to see if it tests at that level? >> i don' think it does hold. i think estimates are going to continue to come down. they're going to report october

25th. i think the q4 is backward-looking. we know they only had one week of iphone sales less than expected. i think you could see a very similar setup that we saw in april after the new ipad launch into the q2 earnings where the stock sold off almost 10% -- >> right. >> -- and then popped when the news finally came out. >> so there will be an opportunity, just maybe not right now. >> i think it breaks. >> yeah. >> i think they're going to get an opportunity to go lower soon. >> okay. speaking of earnings, mike khouw, let's go out to you and talk about this earnings picture because that could be the next break-or-make -- make-or-break moment for this rally here. >> yeah. i'm pretty pessimistic, i've got to say. i mean if we take a look at some of the earnings that we've already seen, we've had norfolk southern, we've had nike, we've had fedex, all of those things are not really, you know, basically telling us a very good story. we're going to be talking about another stock fairly soon, valero. hidden in the midst of all of that is actually what diesel demand is in the united states, down about 500,000 barrels a day from its highs. what does that tell you? there's less truck traffic. less truck traffic tells you there's less economic activity. and to me that just doesn't bode well for the upcoming earnings.

>> just quickly, scott, with the volatility lower, are you seeing much protection being bought ahead of the earning season? >> we do see. with the vix in the 14s, i think you have to buy volatility. you have to buy protection if you're worried. and there's lots of reasons to be worried. mike mentioned several good reasons to be worried. also caterpillar recently lowered guidance. they lowered guidance essentially to the end of the decade. i think it's impressive that they can see out that far, but it's worrisome, given all the concerns about china. >> well, as we had mentioned, there are a lot of earnings out next week, but, dan, you're specifically focusing on a bank stock. oftentimes the first bank stock sets the tone for the rest of them that follow. >> yeah, no doubt about it. so jpmorgan, you have the best of breed, right? and here's a stock that's actually had three 30% moves just this year alone. so it's been all over the place, but it's also in a space in a liter of a space that's done amazingly well here so that a lot of these names are moving back toward these highs. and so, you know, as we get deeper into q4, there's a lot of gains. just like we talked about apple. there's a lot of performance with these names, so i think in a lot of ways, the stocks really have to hold to keep this market together here. so next friday we're going to have wells fargo and jpmorgan, and i think they're going to be important for the rest of the earnings cycle, at least for

financials. >> and just quickly on jpmorgan, what is your general view? >> yeah, listen. i think these companies have -- this company in particular had a lot of self-inflicted wounds -- >> right. >> -- this year, and i think they probably learned a lot from this process. you know, the options market is implying about a 3% move, which is basically shy of the 3.5% move that it's had for the trailing last four quarters. i don't think you're going to be able to see a lot of excitement here. i think this is going to be a quarter, you know, that is behind them. i think the guidance is going to continue to be kind of less than stellar, and i think the stock probably stays within this implied move. so i'd actually want to take advantage of that, and i'd want to look to november a little bit. i'll get to the trade in a second, obviously. >> yeah. >> but to me, i think there's a vol differential between october and november, worth taking advantage of, and i think if obama gets re-elected -- and i know there was a lot of excitement with romney this week -- >> right. >> -- i think he still gets elected, and i think some air comes out of these stocks. >> and i want you to explain vol differential to all the audience. but in the meantime we're going to explain the put calendar, which is the trade that you're putting on tonight, dan.

we've done calendars before, of course, but it's always good to refresh, so let's crack open the playbook and see how this thing works. in this strategy you sell in your data put and use that money to buy a longer data put of the same strike. this is a bearish strategy. it does require timing though. you want the stock to be above the strike of the put you're short by the first expiration but below the strike of the longer data put that you were long by the second expiration. so, dan, walk us through the trade. >> sure. so i did this today, and here's the thing. i'm going to do this trade in earnest next week, wednesday or thursday prior to earnings because like you said, you've got to thread the needle here and you've got to get the strikes right. but i chose october/november of 41 put calendar when the stock was basically about $42. and so what i did was i sold the october 41 put at 50 cents, and i used the proceeds to buy the november 41 put for a dollar. and so what i'm doing here is trying to take advantage of the difference between october vol, basically four points over november. and like i said, i think the stock's going to trade within that implied loop. that's why i targeted this 41

strike. so what i need to happen to make money on this trade, by october expiration, which is basically two fridays from now, i want the stock to be 41 or higher than my october 41 puts that i'm short, expire worthless. then i effectively own these november 41 puts for 50 cents, half of what they're trading for right now. and at that point i want to own november. i think november's going to be cheap, and i think november could be more volatile with the election. and then as we turn toward fiscal cliff sort of issues, at that point i'll hopefully look to spread these in a put spread. >> you know, one of the things that's interesting about this trade, too, is the fact that with actually implied volatility, the price of options is actually very low right now. and that's also true for jpmorgan. and what it's doing is it may actually be understating that implied move just a little bit, which actually gives you a tailwind on this trade. what do i mean by that? those november options are not likely to decay a lot. there's still some catalysts that could hurt the stock between now and the expiration. so i think in some cases, some of these calendars, you might

look at them and say, well maybe there's not quite as much here, i think there is. i like the trade. >> but i don't think that jpmorgan has done anything but hit that number right on the head. given the turmoil they've been through recently, i think it's a lock that they'll be within a penny or two. that said -- and, also, i want to point out i'm actually more bullish these names than dan is, but you're only risking 50 cents. this is a great way to risk 50 cents because the math is working for you, and in calendars, the math works for you best when you're doing strikes that are very close at the money, and dan is doing a strike that's very close at the money. >> dan, let me ask you this. if you were inclined to make a bet -- make a trade on another bank stock and you have jpmorgan coming out, what if jpmorgan reports and sets the tone? what happens to the options of the other banks that report shortly afterward? >> they would probably settle in a little bit. i think, you know, this is one that has been more controversial than some of the others, but then you have the morgan stanleys that we know that imply volatility generally higher on a relative basis, just some of the money centers, so those will stay kind of bid until there are results. but like a wells fargo would soften a little bit would be my guess.

>> all right. let's bottom line this trade with a little stocks versus options. want to short jpmorgan? that could lead to a whale of a loss as shorting stocks carry unlimited risks. on the flip side, dan's put calendar offers big downside leverage and caps his risk to just $50. all right. let's move on here. the recent refinery outages in california has led to severe pain at the pump. that has boosted refiner stocks, which profit from the difference between the price of the gasoline and the price of oil, which has actually fallen of late. so is there a fine opportunity in refineries, or should you make the move? let's call to the charts with the always refined carter braxton worth of oppenheimer. hi, carter. >> hi, there. how are you? so a couple of different shorts, but i want to focus on the uptrend. i mean powerful move in valero, 20 to 35. but what keeps it healthy is it keeps checking back to the trend and keeps finding support at the line. most recently this selloff, 12%, 35 to 31, that's key. and i want to look at the next chart and talk about that selloff. going from the one-year chart to two-year chart is going to put in context the same move, 20 to 35, but it's the selloff, the check-back that takes you right back to prior tops, which represents support, and then put the same move, 20 to 35, in context of the longer term chart.

you have a well defined sort of gently rising trend of less five years, and then in the very long-term chart, it really puts in context what we're talking about. this is a stock that's gone from 5 to 80, 80 to 10, and basically in the process of moving back toward, we would think, the middle of the range here. so we would guess into the 40s or better. >> 40s or better. all right. mike out in los angeles, you're doing a little research, boots on the ground there. what are you seeing in terms of gas prices, and what's your take, more importantly, on refiner stocks? >> well, the gas prices obviously have been spiking here. it's amazing. i mean you go to bed one night and come out the next day and drive past a gas station, and you're going to see the prices are up 15 cents a gallon overnight. it's pretty staggering. basically that's because there's a couple of issues at some of the refineries. chevron had a fire at their northern california refinery. and then exxon had a power outage at their one in torrance, california, and that has put a lot of pressure on the gasoline markets here because you can't make california gasoline at every refiner. that sets up very well for those

that can like valero and tesoro. valero has two big refiners out here. one is in the oakland area at the bellissimo plant, and another down in southern california. they do about up to 300,000 barrels day. this is really a great tailwind for them. i actually did a little back of the napkin. i think this probably adds something like $600,000 a day in profit to valero's bottom line based on about 275,000 barrels a day of production out of those two refineries. you know, the other thing is this company's really cheap. i mean it's trading at about 7 1/2 times full year earnings, 4 1/2 times on the ebitda basis, but i don't tell people to buy stocks that are up 60%. so we're going to have to look for a better way to do it. >> all right. so mike obviously is bullish, and instead of buying stocks, he's simply buying a call. for everyone who thinks options are tricky, this is as easy as it gets. it's always good to hit the playbook for those who might be new to the show. this is a bullish strategy. when you buy a call, you want

the stock to rise above the call by more than the cost of the trade. that's where you see profit. that's all it takes. but anything below that level, and you will see losses by expiration, and that's, of course, the tricky part. so mike, walk us through. >> not much to walk you through here. i'm just looking at the december 30, six calls cost about 95 cents. a simple way to risk a little to get some upside in a stock that's already had a heck of a run. >> you know, it's been a few weeks now, and mike's only been buying calls instead of doing tricky trades. >> i know. where's the old mike? >> i don't know. since he moved to l.a., he's spending more time pumping gas, i suppose. what do you think of the trade, guys? >> he's an oil man. >> listen, mike. you guys laid it out. carter laid out the fundamentals, and like you said, you started off with i don't recommend people buying stocks up at 60% in a short period of time. if you want to express the view that way and lay out volatility is cheap, this is a great way to do it, but, remember, you need a big move to make money on this trade or otherwise you just own this call that's decaying for the next few months. >> that's right. now, mike is buying the call that has been pounded on by covered call sellers. relatively it's just about the cheapest call out there. so from that point of view it

makes sense. i would look at it differently. if you think the stock's going higher or sideways, i would sell a put spread and just collect some of this money. you know, mike lays out a case for the stock being cheap, and selling put spreads is a great way to take advantage of that. >> all right. let's hit the old stocks versus options button one more time on this particular trade. do you want to buy valero? do you think the refiners are the place to be? 100 shares will set you back around $3,200. mike's call purchase offers a big bet to the upside. it will set you back less than $100. not bad. we will see mr. worth later on in the show. in the meantime, got a question? send us an e-mail. the address is optionsaction@cnbc.com. i love to read them. scott loves to answer them in our one-on-one web action. that's right after the show. so check it out. optionsaction.cnbc.com. you'll find trader blogs and trade recaps as well, so e-mail us and check the site out. here's what's coming up next. jack, khouw and carter made a bullish statement. will they double their money? can they find a way to make even more? find out when "options action"

returns. time for pump up the volume. need a vacation? this company jet sets to over 300 destinations worldwide. stocks soared this week while oil took a plunge and options traders jumped on board. 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 are the options traders pumping up the volume this week? delta. at one time it was over three times the average daily volume. time for i need more cash. let's face it. who doesn't. let's find a way to get even more money out of it. last week khouw and carter found a way. here's how. on "options action" sometimes risking less to make more just isn't enough. sometimes you want more cash and that's a case with khouw and carter's winning trade on the sands. they thought it looks like a sure bet. buying 100 shares of the volatile stock that leaves him more naked than prince harry after a billiards game. so to define his risk 44 strike

call for $1.65. now mike has a right to buy stock price. but in order to make money on the trade, mike needs the stock to rise above that call strike price by more than 165 he spent on the trade or in this case above 45.65. anything below that level and mike will see losses by expiration. but now instead of spending more than 4 grand to buy 100 shares, mike spent just $165 to buy that call. that's the most he could lose in the trade, but it gets even better. why's that? because if shares do rise, that call will increase in value faster than stock meaning more money in mike's pocket. and since the time of the trade, lvs has surged 6%, making khouw and carter winners. now these guys are living the high lives, partying with prettyish royalty until the

break of dawn, but, hey, fellows, before you end up in the tabloids let's get back to the trade as "options action's" biggest fans all around the world want to know one thing, how do these two high rollers make even more cash? >> before we get the cash. >> let's get the cash. you'd be looking at a 6% gain. not bad. but mike's call option cost a buck 60 at the time of the trade. can be sold today for 230 and that's a return of 40%. so the question is do you stay long with this name. let's call back to the charts and carter, aka prince harry's muse. do you like the name or are you still hanging with harry? >> we're going to come out of this one. >> come out of this one. mike, what do you say? >> yeah, i'm inclined to agree. right now this option is pretty close to at the money. it's starting to decay much more rapidly here. we have some profits. it's a nice win. we're going to take the money and run.

>> the trouble is we had it where we came out less than expected. >> and las vegas sands is one of those that leveraged more to. huge portion of the revenue comes from mike khouw and that has been really opaque, and that's not been very good. we heard again about china. think that's going to be a problem going forward. looking at las vegas they're actually doing better in las vegas. again, that's a small portion of their revenue. >> mike at this point would you foresee betting more heavily on a las vegas leveraged name? >> interesting i've had to do a couple of conferences and i definitely noticed there's a lot more traffic there year on year versus the ones i was doing a year ago. i don't know that the gaming revenues have picked up quite as much so i'm not overly optimistic. plus some of these names are

also not trading at the cheapest possible multiple so you really need to see some aggressive growth in las vegas to be encouraged to step in at this level. >> mike, conferences? >> i was going to do the same thing. that's what he calls his vegas junkets. our thanks as always to carter braxton worth. a reminder as we head to break be sure to follow us. and dan posts regular updates of his trades on twitter. finally if you're on facebook stay posted on our trades throughout the week on facebook.com/optionsactions. coming up the final call from the options pit. >> what's your best option? follow us on twitter, get breaking news and analysis. follow us on twitter @cnbcoptions. 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.

i was in bangkok myself, but i didn't see you at the disco. which disco did you go to? >> the lowest class. >> i go to the lowest class of all. >> that was marc faber talking to jim rogers on the new line known as futures now.

it's live streaming dedicated to futures trading every tuesday and thursday at 1:00 p.m. the show is also available on demand at futuresnow.cnbc.com. learn what they do when they're at the clubs in bangkok. you would have thought it was a conversation between carter and khouw. >> conference? >> conference in the disco. all right, time now for the final call, the last word from the options pits. mike khouw, why don't you kick it out for us? >> sure thing. buying calls is a sure hedged way to make a bullish bet. >> scott. >> this week's web extra is all about stock's replacement and app. we take our first question from facebook. >> and dan. >> follow us on twitter and find out what i use. >> it looks like our time has expired. i'm melissa lee. for more "options action," go to

our website. see you back here next friday. meantime "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.