there's only one thing that really matters. people first, then money, then things. now you stay safe. bye-bye this is "options action." tonight, drug bust. >> could johnson & johnson be flashing a warning sign to the market? and nathan says yes on a trade that can make you money. break it down. plus, too hot. how would you like to make money in chipotle? the stock goes up, down or nowhere at all. it ain't a magic burrito, but it is khouw and carter's take on the fast food giant, they'll show you how you can make money too. talk about genius. scott nations is using apple mini options that can help you get your money back in apple stock. it's a pint size trade.

with a punch. the action begins now. in the heart of "new york times" square, i'm melissa lee. these are the traders. opportunity is knocking. that's because the heart of earnings season is here. the goal tonight is clear. find names and strategies that can help you property from next week's news. let's get to "money" right now. could earnings kick it off next week? mike khouw? what do you think? >> i don't think so. >> we're all bears. week after week after week you're bears. week after week the s&p 500 climbs to record highs. i want to point that out. >> between cautious and bearish. >> let's take a look at a couple of things. one of them is that we are starting to see valuations get a little bit stretched. there's a lot of names that are trading at multiples that are well above what they do in general. i think that's a little bit troubling. some of the names that haven't recovered are places you haven't looked. take a look at microsoft. finally start to climb out of

the dog house. everybody comes out and say pc sales are crummy. earlier we had bad news from fed ex. ups has been beaten up. i look at that and say that could be the tip of the iceberg. at some point the data has to back up all the optimism and i don't think it's going to. earnings is going to be key. at the same time, i'm curious when we saw gold closing in july 2011, does that factor into the marketplace or is gold driven by other things? >> i think it factors in. gold got crushed today. it just got killed. in the option world people were crawling all over themselves. gld up 40% which is a huge move. i think that gold is also what, it says about the broader market is the that the fed can't keep stocks higher. i think that that's a huge problem right now because we worried about north korea, we've worried about italian elections, we've worried about cyprus, but

the fed outweighs that. if they can't keep it higher, there's no way to go but down. >> i think the fed can keep up financials. some of those stocks still look cheap. everywhere else you have to deliver. >> there's the charts. to me, you talk about gold and segue to some of the things that are working here right now. when we look at what has gotten us here over the last year. >> ray of sunshine from dan. wow. what a switch here. >> defensive issues that have been doing a lot of heavy issues. if you think about some of the best performing sectors this year, you have health care up 20% year to date versus the s&p that's up 11.5%. you have consumer staples. up about 17%. you have utilities. these are some of the most defensive names. why are people going for them? obviously yield. there's no yield anywhere on the planet. to me, if you are running there, it just went parabolic. that makes me nervous. it should make investors nervous.

>> i'm going to throw out what technical analyst louise rumana said. that is, you take a look at some of the charts for some of the names in health care, they have made things not as tenuous as you might think. you see a big streamline up, but they have been basing for two years. >> that is exactly it. they've been basically since the lows. they have a nice technical set up here. they went parabolic. you know what it reminds me of? apple from the 2009 lows. the way it worked up. it was defensive, defensive, defensive. then last year at this time it went straight up. that was something that could continue to go. apple's a different story. >> you're saying a name like t. and j. is like apple? >> i'm saying it starts to act like it. it makes me nervous. investors should take part. we're going to talk right here. here's a stock that's expected to grow earnings. 6%, 7% for three years. it's trading in the high teens. at year highs it's getting a little over done.

>> johnson & johnson is what they're talking about. >> right. >> johnny john. trader talk. >> dan's obviously bearish here. surprise surprise. he's buying a put. you want the stock to fall below the strike that you bought for more than the cost of the trade. that's where you see profits. above that level you will see losses. it's that simple. dan walk us through the trade. >> i'm not particularly bearish on johnson & johnson, but when you look at its valuation relative to its peer group, it's getting very, very extended based on historical levels there. to me, what i looked at is the options and they're very, very cheap. earnings are going to be here next week. this is not exactly an earnings play. there was a downgrade in the stocks. jpmorgan downgraded it. they think there's going to be a negative earnings revision when they report for the balance. year. implied volatility is very cheap. it sets up nicely to own premium.

i want to look down right now. what i did today, when the stock was 8255, i paid 1.35 for it. that's 1.5% of the underlying stock price to get the next five or six weeks that include the an earnings event. here's the deal. i paid 135 for it. i basically break even at 81.15. that's my break even. i can lose up to 1.35. between 8115 and 2 1/2. this is a very low volatility name. this is one of the situations that dan is doing. do i think this stock over the next five to six weeks could move 1.5% plus in either direction. if you're going to make the bearish bet, this is where the put could make sense. there are a lot of things that could make it move lower. this is a way you can decide to make a bet to the down side without taking a great deal of trouble. >> even if the stock trades down to where its peers are trading. it's trading at a 16% premium to large pharma names.

that's the basis of the downgrade we saw earlier this week. why pay 1.35? why not make this a spread? >> that's a great question. normally we do want to trade spreads because you can get the math working for you or you can reduce the cost of the trade but in a low volatility name, low implied volatility name where the options are really, really cheap, dollar cheap, there's no reason to get too cute. buy an option. buy it more or less at the money option and then you don't have to worry about spreading out of it or spreading out of your spread. >> let's wrap this up. stocks versus options here. want to short j. and j., call a doctor. that risks unlimited amounts of money. dan puts purchase offers big leverage to the down side to $135. now let's move on to a topic most viewers will like, and that is falling gas prices. gasoline hitting a fresh three-month low now off 16%. from the 52-week high. that has given a boost to casual dining stocks. lower gas prices means more money in consumer's pockets.

which stock in that sector should you buy? let get answers from the man who was the real life inspiration for the hit tv show -- wasn't it a tv show, guys? man versus food. carter. >> hi there. yes, gasoline prices plunging. there's an inverse correlation between casual diners and the price of fuel. the first chart shows you just that. it's 1.5 year chart. as you see here most recently, this plunge in gas from 3.30 to 2.80, that gives you this surge. this is an index of things like domino's pizza, it's got ruth chris steakhouse, panera and so forth. here's the same composite of restaurants with chipotle. it's been a lag ard. it's idiosyncratic, had it's own problems. this casual diner is going to catch up.

look at chipotle outright. here's the problems it encountered. here's the nice recovery. at something of a neck like in this head and shoulders bottom. we think it throws back here fills this gap. it closed today around 3.40. we think you get paid back at 3.70. on an earnings beat. >> mike khouw i turn it to you. this week they came out and said chipotle is a short. there is no such thing as a gourmet burrito. >> this is a relative thing. gourmet burrito relative to taco bell. >> fair enough. >> in that case maybe there is, like as much as there can be a gourmet hamburger as well. it's tough to make a valuation for chipotle as well. why? because the valuation is high. it's trading 40 times earnings. you might wonder if it's mature. we faced a similar dilemma not that long ago when carter was making a bullish bet on netflix. remember how right he was about that. i trust my man carter.

i'm going to go with his instincts here despite the fact that valuation is not the most compelling reason to make a bullish bet. >> usually we buy them. let's walk through the strategy. it's a bullish structure. sell one put and buy a similar strike put. the goal you want your stock to trade above that put strike. on expiration. that way, you can keep the profits you took in. should the stock fall you will see losses but the losses are capped at the strike of the put you bought. mike, what's the trade? >> i'm looking at selling the june 330 puts for 14.80 and buy the 3 and a quarter. 13 bucks, taking in a credit of $1.80. watch your limits. these are high dollar priced options. the spread can be a limb bit high. the idea is i'm trying to collect as close as i can to 40% of the distance of the strikes. i'm getting pretty close. if the stock stays high, i'll get the money, if it goes down i'll collect the money. if it drifts down, actually, it's not going to go to the full

value of the spread. the idea here being that i wouldn't go out to buy the stock to make a bullish bet. if i'm going to do it i'm going to do it in a risk mitigating way. >> let's deal with the fundamental question would you make a bullish bet on tmj. cmg? >> i usually never disagree with carter but i do not like this setup here. >> why? >> when this thing went parabolic last year it broke down and crashed almost 50%. it's now recovered about half of that decline. i think it's in no man's land. i think the fundamentals are -- >> gas prices are coming down. food costs should be going down. >> it's still expensive. >> i agree with jeff. >> no such thing as a gourmet burrito. >> i think it's all garbage wrapped up into -- >> it will kill ya. >> if you think it's in no man's land, then his trade makes a lot of sense. >> i'm worried about the gas lower. >> material deceleration in growth. >> i don't know if we can bring that chart up again. that's the reason you don't go

out and buy the stock. if that's the situation, you could just get stabbed when that comes down. if you're going to make a bullish bet, make a premium. >> define your risk. >> jumbo shrimp gourmet burrito, do they cancel each other out? >> yeah, yeah, you've got nothing. you've got a burger. got a question, send us a sweet cnbc.com. we have a lot of questions on this so you do want to check that out. here's what's coming up next. >> they wanted to make ben hur, but they gottishtar. i'm talking about khouw and carter on their bearish bet on time warner. what went wrong and how will they fix their flop of a trade? find out when "options action" returns. ♪

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[ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ it's a huge week for tech earnings with names like google, intel, yahoo all reporting but it's an ebay that's got the controversy. time to put up or shut up. dan and mike duke it out over the fate of your stock and your money. 60 seconds on the clock. dan's a bull on ebay, mike's a bear. no filibustering. mike that's a reminder for you. kick it off. >> me to kick it off? the bear starts first. ebay obviously has had some pretty stellar growth. particularly in the payments area.

this is something that in 2007 doing less than 2 billion bucks. it's over $5 billion. that's pretty stellar growth. the thing is, the it has traded over 20 times average earnings. it's closer to 30. when you buy a stock you want to be interested in how much it is on a stand alone basis but what the competitors look like. you could buy visa at 22 times earnings. you could buy master card at 24 times the earnings. they're in the same business but they don't have the options business. from my perspective, i'd rather be one of those than in ebay. >> michael, let's not forget about the beanie baby business. i think you're right on the growth. they held an analyst's meeting last moment. they basically looked out to 2015. they basically gave you the answer key. they expect to grow earnings 15% for the next few years. that's not too bad. on a forward basis, on 2013's estimate it's trading one time that expected growth, 17 times. so to me i think the real story about ebay is you don't want to

buy it here. >> buzzer's gone. >> really? >> yeah. let's call it. scott nations, what do you say? >> i am full up on beanie babies and pez dispensers, i don't like the name. >> sides with mike. >> carter? >> i'm sticking with the chart. it's good. we're long. >> it's a tie. >> i pick ebay. the paypal story's pretty compelling, mike. i don't know about you. that's where we stand. dan, walk us through the trade. >> i didn't get to make my point. i think the stock has to consolidate. next week they report earnings. i want them to come in a little bit. the trade i'm considering doing is the june july call calendar. i'm selling june, buying july. which is going to capture the 2-2 earning. if i do that right i can thread the needle and own the july call. that spread costs me about 60 cents. that's my max gain. by june expiration i want it to be 57.5 and then i own the july call.

that's my trade. >> mike's trade, we should note it's a losing trade, will get posted to twitter. along with our trade updates. you want to check that out at cnbc options. dan does post regular views of his trade. at risk reversal. what do these two people have in common? take a look. absolutely nothing except for the fact that we're going to talk about one of the hottest trades of the year, media stock, and this is the best footage we could find. come back right after this. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade.

♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪

everyone loves a winner, but when trades don't work out you just want to say, dude, fix my trade. a couple of weeks they made a bearish bet on time warner. the stock has rallied but they haven't lost too much money and here's why. >> on "options action" just because we risk less doesn't always mean we'll have a blockbuster trade. sadly, that's what happened with khouw and carter's bearish bet on the media giant, time warner. carter tuned into time warner's chart and didn't like what he saw. >> this is a pretty good time to harvest gains, take your profits and sell short. >> have your people call my

people, mike said, we're going to make a trade. shorting the stock, that's fine. but we do have one question? >> are you out of your funking mind. >> after all, shorting time warner or any stock carries unlimited risk. to carefully define his risk, mike bought the april 50 strike put for 80 cents. to make money mike needs time warner to fall below the 80 cents he spent or by 49.20 by april expiration. mike, let me get this straight. you want to pay 80 cents to bet against time warner? >> what you've just said is one of the most insanely idiot particular things i have ever heard. >> mike, my man, let's do this for less. >> sell the others for less. >> to spend less mike sold the april 48 put for 45 cents and created his put spread but he did something even better. he made money even easier. between the 80 cents and the 45 cents he collected by selling that lower strike put, mike has

chopped the total cost of his trade in half to 35 cents. know instead of needing it to pal below 49.20, mime cashes in so long as they fall below 50 cents or below 49.65 by april expiration. >> i love this plan. i'm excited to be a part of it. let's do it. >> keep in mind, there's a tradeoff. by selling that put mike has capped his gains for the difference and the strike and the put that he bought and the striesk the put that he sold, minus the cost of the trade and it's a good thing he did cut his cost because since the time. trade time warner shares have added 15%, making this trade a loser. now khouw and carter are the shame of tinseltown. shunned even by the likes of these guys. >> he was in the back of the police car wailing. >> hollywood loves a good comeback stories.

options action fans, how can these two fix their trade? very sad story, but maybe this will make everyone feel better. had you shorted time warner, you would be looking a the a loss of $700 and be on the hook for unlimited losses. mike's trade is worthless but it only cost 35 bucks. not great but better than the alternative. this trade expires next week so the question is do you stay short time warner? let's call back to the charts with oppenheimer's carton braxton worth. >> we're out of time on the trade but from our point of view on the chart which is worse, it's gotten steeper, more dangerous. the resolution is that much more grotesque. we would stay short. >> wow. that much more grotesque. mike, how about you? what do you do? >> obviously we're not going to take off that trade. there's nothing to it. we're going to leave that on. i'm inclined to go out and buy the put spread. the reason you do this is trying to short this market is a very painful exercise. that's why you have to risk very

little to do it. that allows you to play again. that's what i'm going to do in time warner. >> i think that's the interesting thing. you want to risk a little to make a lot. coming up next on "mad money", cramer's checking out pfizer. your game plan for next week as well as your tweets. coming up next, we have the final call from the options desk. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪ [ male announcer ] when the world moves... futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with papermoney to test-drive the market. ♪ all on thinkorswim. from td ameritrade.

♪ [ indistinct shouting ] [ male announcer ] time and sales data. split-second stats. [ indistinct shouting ] ♪ it's so close to the options floor... [ indistinct shouting, bell dinging ] ...you'll bust your brain box. ♪ all on thinkorswim from td ameritrade. ♪ move over mallo because the oregon zoo might be hiding one of the brightest basketball prospects. that's eddie the sea otter. he's 15 years old and he has taken to basketball to help his arthritis. trainers say he likes the exercise as well as the fishy treats he gets after a score. no word when the knicks will sign him. that's optional viewing. apparently he tried volleyball.

but it didn't have the same effects. time now for the final call. the last word from the options desk. scott. >> many options. they correspond to ten shares rather than the hundred shares and are on high priced stocks like amazon, apple, google. started trading last month and the web extra is all about them this week. >> good tease there. >> dan nathan. big week for earnings, so a lot of potential. >> don't buy premium into earnings, week of, weeklies. it's kind of dangerous. i would say the staples trade, the health care trade is getting a little crowded. the ball is really low. look out a little bit, don't just focus on the earnings and i think you can pick some spots. >> mike? >> gold could be cracked on the ice. i don't want to stand on it. >> would you be bearish gold monday? >> i certainly wouldn't buy it. i think it looks terrible. >> all right. very plain spoken. looks like our time has expired. i'm melissa lee. have a fabulous weekend. check out options action cnbc.com.