that will do it to us for tonight. i'll see you on monday and on "wall street journal" report on sunday. "options action" begins right now. this is "options action." tonight cliff hanger. could american express fall victim to the fiscal cliff. we have an options trade to quadruple your money in just two months. risk one make five. how would you like to quin tuppal your money in home depot by the end of the year. it is the options trade on the big box retailer and they'll show you how you can make money, too. >> why are all the traders banking on the shares. the action begins now. live from the nasdaq market site i'm melissa lee. these are the traders and the best thing you can say right now

for stocks is that the market is closed. fiscal cliff plus earnings equals pain. is a selloff creating opportunities for you. the market is in two camps here. disney and group on and fiscal cliff names. how do you navigate this? >> i think you have to be cautious. when we headed into the election the market had pretty adequately digested a weak earnings picture and then we had the uncertainty come. to me there wasn't a lot of uncertainty about what the outcome of the election was but there was a lot of hope built into the market and that was taken out of that. today's action people are breathing a sigh of relief because we are unchanged. that is really, really horrible price action when you consider the damage over the last two days. i think you have to be cautious because it is going to go back and forth. we are going to hear boehner. think about what happened today when the president held that press conference.

the market dropped in a straight line. >> it is interesting if we take a look at the options market going into the election is interesting because a lot of premium came out which suggested a great deal of uncertainty it. i was surprised there would be uncertainty. if you look at the longerer dated vix those are rising in value and suggests that people are uncertain about what is coming in the 60, 90, 120 days from now which is surprising when you consider i thought the election was a foregone conclusion. why is everybody so surprised about europe and surprised about china. >> we don't normally see the market react like this when the president that we expect to see elected ends up being elected. i think dana is right. the s&p closed on the effective low of the day, the last half of the day. the vix ended up closing on the

high of the day effectively in the high of the last half of the day. and i really think the vix was telling this week on thursday when the s&p had a horrible time the vix was actually lower. and i think people felt like they had seen the worst of the stock market. but then today on a friday with the s&p higher you would have expected the vix to sell off a little bit and close on the height of the day a little higher which is disappointing. >> we want to talk about these two camps and walk through what we mean. take a look at the earnings specific stories. really steep declines here. group on hitting a fresh record low. jcp ditto. disney down 5%. and then fiscal cliff stocks. by that nice run up year to date. people wanting to lock in at 2012 gains and/or a dividend play like at and t and also

provide a yield t. is a double whammy. >> and also defense stocks. so you have the defense stocks which would be directly impacted by the fiscal limitation. >> this seems like the perfect opportunity if you wanted to sell stock but were afraid of missing out you could use a stock replacement strategy. >> we talk about it in the web extra. also you can buy puts. we saw another name that had gone really well recently. we saw put buyers in bank of america and citi bank today. >> if you take a look at the various sectors that will likely get hit by fiscal cliff concerns you have a trade on a stock that lives at this cross roads. retail being impacted. high end consumer as well as financial industry. >> one of the hardest hit sectors were the bank stocks.

some stocks in the financial sector acted pretty decently. american express is one of them. here is the stock up 18.5%. it is used as a proxy for a high end consumer. what do we know about the fiscal cliff? we know that they made the burden. to me i took a look at american express with the stock around 56. the high volatility seemed reasonable. if you think there will be a rocky period american express could be a stock to take it on the chin. >> clearly dan is bearish today. he is buying a put spread. it is a common strategy. it is good to crackopethen playback. a bearish strategy you buy one put and sell a lower strike put to reduce costs. you want the stock to fall to the strike of the put.

>> i looked out to january. the volatility at the money two months out is about 22.5 mpt22. today when the stocks are around 56 i bought the january 2013 my max gain is 53.75. below 50 i make the pull 3.75 and could lose up to 1.75. you get my point here. a little exposure to the down side. >> would you select american express? >> it is a good place to make a bearish bet.

everybody is acting bearish which is interesting because the money center banks are propped up by the policies supporting. those are the things that are elevated. this is more related to the economy. that is where you expect fiscal pressure to be applied. this makes perfect sense. >> where am more optimistic about consumer names. first of all he is getting long the at the money put. that is fantastic. he is only spending a quarter of the width of the spread. i don't agree with the stock this is a great thing. >> you have to believe is one or two of the following things.

>> i think americans think about the fact that they may be paying 2%, 3%, 4% more in taxes. americans make their money on transaction volume. >> california voted in the tax increase. you have a lot of wealthy individuals. i carry american express card. does that effect my spending? yes, it does. >> let's bottom line this all. >> as the old addage would say don't leave home without it dan's put spread limitt suggests $125 and offers a four to one payout. moving on to the next trade call it the battle of the big box retailers wal-mart and home depot report earnings next week. this comes amid a massive storm here in the northeast. how should you repay?

let's call to the charts. we are speaking about carter braxtonworth. >> take a look at a few charts home depot a great winner. almost suspiciously so. when you are at the top or bottom of the channel you want to feed it for a move in the opposite direction. a long term chart. this is home depot now relative to not only where it was at the height of the housing bubble in '06 but where it was when it was at the top of the tech bubble in the dot com era. the original chart we were looking at the two-year chart. this is relative to wal-mart. take a look at the long-term chart since home depot's ipo.

we would say the more vulnerable if you will is home depot. >> home depot looks like the better short of the two. mike, do you agree? >> fundamentally i think this is a bit of a stretch. it is a little over 22 times earnings. that is the upper end. lot of people are pricing in optimism from sandy. the stock has outperformed the s&p by about 4%. you ought to take a look at the 10 k and what they have said, what they have been talking about is the fact that the repair and remodel business is at the end of the week. in the meantime since the beginning of october we have seen increase in lumber prices of over 10%. 20% of the net comes from lumber. you see an increase in the input cost. you might get incremental sales out of that. hurricane irene. there is a lot of good news priced in and maybe not bad

news. fundamentally i think it might be overvalued here. >> mike is bearish. he is also buying a put spread. we did go through the play book with dan's trade. >> i am going to do something similar. i am going to buy a put spread specifically the january 57.5 puts and then sell the 55s against it for 50 cents. obviously less than 1% of the stock price gives me a little time for this to play out. i should see decay especially out of the cheaper option after the event. >> the technicals you cannot argue with. i like the structure. here is a company trading at 20 times next year's earnings that are only supposed to grow. it doesn't make a lot of sense to me. if you want to make the short bet it is a great way to do it. it is a decent short of the stock. there is a lot of good news. >> even though you can face a lot of unlimited losses?

>> i would never short that stock not even with the american express money. i don't try to catch the first 10% of a move. i think you are trying to catch a good 10% of the move. i would wait until it is below that channel. >> you mentioned home depot is more correlated to gdp as the housing market. do you think we are in the upswing and different momentum trade. we could have made the same case. they keep going higher. >> i wonder whether the home builders are getting to be fully valued here. i am taking the remarks directly from the company. this is what the company is saying will drive the success. >> take a look at what they are doing in china. does that tell you that there is growing sales there? not really. >> was it a china play? >> what is baked in the cake is the 4% performance we have seen as people are betting on higher

sales from sandy. a lot of stores sold out. i'm not sure they will make as much money and have as much impact on the aluation. >> you can get pretty much everything at home depot except for stocks versus options. short hd. stocks can go up forever but can only drop to 0. it can make up to five times his money by january expiration. we will see carter a little later on in the show. in the meantime got a question send us a tweet. we'll answer it on our one-on-one web extra right after the show on our website. you will find trader blogs as well. here is what is coming up next. the people have spoken. dan is a trading whiz. last month he built a bearish bet on jp morgan but let him cash in on an obama reelection. find out when "options action" returns.

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where were options traders pumping up the volume this week? fifth third bank corp. welcome back. let's check in on an update on a developing story on lockheed martin. >> first we had david petraeus resigning and now incoming ceo at lockheed martin, the nation's top defense company resigning. the incoming coo who was going to replace him will replace him in january. >> thanks for that update.

time for the upside call. we take a look back on previous winners. a couple of weeks back dan made a bearish call on jp morgan stock. he has made seven times and here is how. >> on "options action" it's money in the bank. risk less so we can make more and that is just what dan did on his bearish trade on jp morgan. >> if obama gets elected and i know there is a lot of excitement with romney this week i think he gets elected and air comes out of the stocks. >> just going short. >> you can engage in risky behavior. >> the president is right. so to define his risk dan bought the november strike put for $1. dan needs jp morgan to fall below by more than a cost of the trade or below $40 by november expiration. but paying $1? really? >> we have more work to do.

>> indeed we do. >> show us how to risk less. >> i sold the october put. >> so to spend less dan sold the october strike put for 50 cents and created his put calendar. he did something -- selling the other shorter dated put dan cut his cost to just 50 cents. now dan sees profits if the stock falls by more than 50 cents he spent on the trade or below 40.50. it gets better. that's because the value of the clip that dan sold will decrease faster than the value of the longer that he bought allowing him to do something that these guys can only dream of doing, turning time into money. since the trade dan has been

proven right. the stock turned south after obama's reelection. everywhere dan goes he is surrounded by supporters. amid the pomp and circumstance dan don't forget about the trade because "options action's" biggest fan, one of our biggest fans only wants to know one thing, what will dan do now? >> what a diverse and bipartisan crowd. before we answer the president's question let's see how much money was made. had you shorted jp morgan you would have made about 5%. dan's put calendar cost 50 cents. the october put expired worthless. he is long that november put which is at the money and decaying. the question now is dan going to clean up the trade and look to roll it or turn it into a put spread. >> our twitter followers saw

what i did. after that october put expired i actually sold a lowered strike put in november and created a put spread. and today when the stock was down below 40 i took it off. so to me like this is a great way to use options. a lot of people think about calendars and use them for a pure ball perspective. i tried to thread the needle and it worked out just fine. regardless you are lowering your cost of doing it by choosing a calendar the way i did. >> we have to find out the direction of jp morgan and we have to check in with the master of the charts. what do you see for jp morgan? >> sometimes a stock is literally priced exactly where it belongs. having moved all the way to 44 and pulling it back it is worth exactly $40.62. we call this fair money dead money.

>> fair money. at this point, if you are a holder of the bank and you heard jp morgan was traded where it is valued. >> i think if you own a stock and you think it will be range bound those are covered put right opportunities, you own the stock, sell some calls. this is really the way to manage these scenarios and as volatility increases it increases the amount of return and yield that you get for doing that. that could be a good opportunity to take care of stocks like others in similar circumstances. >> we look for a bank not priced where it should be. i think bank of america and citi -- it is tough to add to a low. don't just buy more stock in situations like that. >> a reminder as we head to break if you want updates be sure to follow us on twitter and dan does post regular updates of his trades on twitter.

if you are on facebook stay posted on our trades at facebook.com/optionsaction. our thanks to carter braxtonworth of oppenheimer. [ male announcer ] trading's like a high-speed train. 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. [ male announcer ] the markets keep moving.

make sure the news keeps coming with thinkorswim by td ameritrade. use the news links breaking stories with possible breakout stocks, options with potential opportunity, futures and forex with in-depth analysis. it's an all-you-can-eat buffet for all things trading. thinkorswim by td ameritrade. it doesn't just deliver news. it's making news. trade commission free for 60 days, plus get up to $600 when you open an account.

this baboon doesn't monkey around when the comes to parenting. the hairy resident recently adopted a baby kitten that wandered into her enclosure. the friends are inseparable though the monkey sometimes steals the friend's food. time for the final call. the last word from the options pit. >> all about what to do when your stock replacement strategy works perfectly. >> american express can fall prey to the outcome of the fiscal cliff. >> i want to buy put spreads in home depot. >> looks like our time is expired. i'm melissa lee. for more "options action" check out our website.

money in motion is up right after this. [ male announcer ] trading's like a high-speed train. 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. ♪

welcome to the world leader in derivatives. welcome to superderivatives. make sure the news keeps coming with thinkorswim by td ameritrade. use the news links breaking stories with possible breakout stocks, options with potential opportunity, futures and forex with in-depth analysis. it's an all-you-can-eat buffet for all things trading. thinkorswim by td ameritrade. it doesn't just deliver news. it's making news. trade commission free for 60 days,