this is "options action." tonight, get your groupon? ♪ people gather round >> we have a way to make money on groupon if the stock goes up, down or nowhere at all. plus, what's this guy talking about? >> about two weeks ago, i bought a january 400 call, so, the january 460 call and i sell the january 325 put, zero. >> nice. >> no cost. >> dan nay than will give you

the scoop on that apple trade and show you how to make money, too. and, not loving it. ♪ i'm loving it >> scott nations explains why option traders are getting bearish on shares of mickey d's. he'll explain. the action begins right now. live from the nasdaq market site in the heart of new york's times square, i'm melissa lee. these are the traders here in the dasing and beautiful los angeles. while the markets make new highs, there is one name we say you need to watch, and that is caterpillar. the stock is down more than a percent and a half today alone, and this is the s&p 500 continues to defy gravity. cat is close to being flat on the year. so, the question here is, is this a warning to the world or a buying opportunity? let's get in the money and find out right now, dan, what's up with this? >> listen, i actually do think it's a good warning here. when you think about what's going on in the market, the u.s. is a massive safe haven. we hear people say, crowd into the names that have a lot of u.s. exposure, not to the problems that's going on in

europe and cat tractor doesn't really fall into that category. they get 35% of their sales from the u.s. the rest of it is subject to this dollar that seems to be strengthening, the whole world think it's going higher. that's one of the main reasons for the underperformance today. >> mike khouw, when you look at the chart, though, cat does look like it has been trying toe make a recovery, or at least move back to what the market is doing in terms of going higher, since about mid-april or so. in fact, i think it's up 10% since then. >> yeah, i mean, among the dow industrials, this one has the highest short interest, though that remains very low. looking at names like cat and maybe deere, what you have are names that are trading at valuations that reflect a global growth story that's very weak, despite the fact we have monetary policy that should be inflating stocks. that's why this stock is trading at a cheap multiple on a p.e. basis, on an enterprise value. and i think what's going on here is that if you own stocks, you feel like you want to go into

these names that look like very attractive valuations here, but obviously, if the global story is challenging, and if they're earning their income in foreign currencies that are depreciati g depreciating, that's going to pressure their result lgs. >> and the other piece of the equation is that cat sells a lot to miners. >> that's absolutely right. and, dan mentioned that dollar strength is a problem for cat. for a couple of reasons. one that you mentioned, if you are going to use a cat machine to dig up ore, that's not working out for you. and the fact they sell so much overseas. the stronger dollar hurts cat. it hurt bonds today. killed bonds today. and i think that actually may be good for the overall market, but it's a problem for cat. i also think that deere is interesting, and mike mentioned deere, the fact that deere was up a little bit today tells me that the problem has to do -- has more boeing was done today, as well. >> well, dan is doing a put

spread tonight. here's how the strategy works. you do this when you are bearish and you want that stock to go to that short put strike. that's where you make the most money. that's where your profits are capped, so, dan, walk us through it. >> and i think you made a couple of important points. i don't think cat is a great short on a valuation basis, adon't think it's a great short becau on the year. at some point, this stock is going to work. right now, in a near term basis, it rallied 10%, 11%. i think a lot of bad thursday was in the stock there. i don't think it is now. i want to use a defined risk way to short it and do it through a put spread. today, when the shock was 88 1/2, i paid $2.15 for it. that's my max risk. i buy one of the july 87 1/2 puts. i sold one of the july 80 puts at 90 cents against it. i can profit between $85.35 and $80.

below $80, which it was just a month ago, i make that full $5.35. my max risk is the $2.15 and if the stock is above $87.50, i lose that $2.15. th this is a defined risk way to play. >> mike, is this a trade you want to get into in a point in time in the markets where there seems to be a rotation to cyclicals. if there is global growth out there, this one is going to play a little bit of a catchup. >> that's a great point. the stocks that are looking like cheap valuation names are the places where people want to put their capital. that said, this is kind of a time of year when you might expect to see a little bit of weakness. we had a very strong market for some period of time and if all stocks pull back, that should effect this one. you want your profits to kick in sooner, because the valuation is likely to make the downside in caterpillar some what limited. i like the way he's playing it here. >> and i like the fact that he's long volatility. right now, implied volatility is relatively cheap on a historical

bas basis. we like to look at how much he's paying versus the width of the spread. it's great given he's long the at the money put. >> let's wrap this up. want to get short cat? that could scratch your portfolio because it carries unlimited risk. dan's risk is just at $215. let's move on here. left for dead high fliers like green mountain, barnes & noble and fossil showing gains this week. is this a sign that the rally is broadening out? let's call to the charts with the man who some consider a national treasure in the chart world, at least. >> hi, there. so, what's important is group , groupon,edgroupon, advertising stocks are all on the move and this one's next. so, ipo at 30, a wipeout down to

two and you are broken above this down tren trend. it has all the hallmarks of a rounding bottom. it's the same chart starting at 30 since the ipo. or just rely on the smoothing mechanism. the next chart juxtaposing the share. when you go flat, you have a sign that something that has been bearish, is reversing. you have lots of upside here. a little down side, get long. >> all right, i want to go to mike khouw. i know you are a sucker for smoothing mechanisms. >> well, i mean, it has to be really a technical play. if you look at the fundamentals, they don't have enough of a history to go back too far, but what we noticed is that they have not made any money. after they got rid of andrew mason and ted and eric have taken over, they seem to have stabilized things a bit. the street is the looking at 20 cents a share. 35 times that number, the stock is looking kind of rich here,

but if they stabilize the business, sales actually came out better than expected. looks like they are taking a little bit of market share away from living social and google. and also, the mobile side of those revenues is up to 45% of the total from about 30% a year ago, so, it does seem like they have been making that transition to mobile fairly effectively. if the company is going to get any traction, now might be the time. >> all right, mike tonight is selling a put spread, and remember, dan just bought one. let's go through the difference here. so, unlike dan's bearish trade, receiving a -- selling a put spread is actually a bullish move. the goal? you want your stock to trade above that short put strike on expiration. that way, you can keep the profits you took in. should the stock fall, though, you will see losses. but those losses are capped at the strike of the put that you bought. so, mike, walk us through the trade. >> so, i was looking at the july 6th 5 1/2 spput spread. this is actually not as narrow as it might otherwise appear.

i'm receiving those $6 puts for 48 cents and buying. i'm taking in a net credit of 20 cents. that's 40% of the distance between the strikes here. nice thing about a trade like this, of course, that if the stock just languishes here, the market does pull back even slightly. i could still collect that money, in between now and expiration, if the stock is put to me. i am protected at lower levels. i'm risking 30 crept cents on t trade. >> what carter said about risk in the chart, to me, that doesn't lend itself to selling a put spread. i don't think it's a bad options trade, but if you really are bullish, there are -- >> like what? >> i mean, listen. even with imflipped volatility really high, if you think there's a takeout, you know, 0 $10, $12, there's other ways to play for a meltup. it still has 10% short interest. if you want to put on an options trade and collect some premium, great. if you are playing for a big move, that's not the way to do it. >> you scale your trade

appropriately. what you're taking in is 20 crepts over 30 crepts worth of risk. the other thing is, we're looking for these situations there are not a lot of them where you get to sell premium in this market and feel comfortable about it. getting 40% between the strikes is one of the rare cases at this time. and look, we've done trades like this on similar types of names. very hard for me to commit on a name where fundamentally i'm not feeling as strong to just going out and buying premium. >> and the stock has to develop double digits for you to lose that maximum amount. if the stock is between those strikes the you are going to own the stock and if it is down there, i probably don't want to be an owner of it. >> maybe things could have worked out better if for groupon, if they offered this deal. want to buy 100 shares of groupon? that's risking over $600. mike's trade would be looking at a loss of $30. got a question out there? send us a tweet and we'll answer it on our web extra, that is right after the show on our website. you do want to check this out, because scott's got a bearish

trade on mcdonald's. in addition to that, you'll find great educational material and trader blogs, so, check it out. coming up next, how one hedge fund manager made a killing in apple using options. explain how he did it and how you can do it, too. that's what's next. well, that wasn't so magical. dan made a bearish bet on disney, but the stock has just flown higher. so, how can he beat the mouse house and save his trade? find out when "options action" returns. ♪ [ 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. what makes a sleep number store different? what makes a sleep number

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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. ♪ i had a great trade, actually, about two weeks ago, i bought a january 400 call, so, the january 460 call and i sell

the january 325 put, zero. >> nice. >> no cost. took out about $30. >> that was leon cooperman on "the halftime report" from salt in las vegas, talking about his bullish trade in apple. you might say this, what is he talking about with the puts and calls? well, thank the cable gods for giving you "options action," because we are going to break it down here. basically, he's doing what's called a call spread risk reversal. he sold a put, used that money to buy the 400 460 call spread. he can make $60 by january expiration, but because he sold the put, he must be willing to buy apple at that put strike price for $325, even if it goes below that level, of course. so, dan, you are active in apple. >> beautiful trade. you know, on a mark to mark basis, if the stock had gone down towards that 325 strike, and just remember, the options

market, if you did that before the earnings event, it was an 8% move, it does not get you down to 325. he was conservative on that. that's a great, great trade. when we say it's for free, it's really not for free because if the stock does go against you, you're going to have losses. so, one of the ways that i think you can modify this trade for the people out there is maybe sell a put spread to buy a call spread and define your risk. that way, you don't have that risk to the down side. >> mike? >> yeah, you know, i think probably the biggest change i might have made to this trade, i just would have shortened up the duration a little bit. when you get short, net short options over a longer period of time, it's harder to realize the difference. if he bought the stock at $325, that would have been shaving about $100 billion off the valuation compared to where it is right now. that would have put the value at about 180 billion bucks. that's one-time sales, 4 1/2 times earnings. you have to look at something like that, say, okay, that's where he was tdrawing the line n the sand. i think that's a really smart way to play in names like this, that don't have a lot of

leverage on their balance sheet. >> let's go to carter here and look at the chart. do you like cooperman's levels here and where do you see the stock going at this point? >> we think it's a great trade, but the levels are great. the stock topped at $705, seven months down, 55% decline. but here's what's important. when we first broke above trend and we started to faulter th fa never went below. we think $520, i mean, plenty of upside. >> all right, let's pretend this is call to the charts here. what kind of trade would you put on? >> well i think in apple you can absolutely buy a call spread. i think you can do a little bit of what he did. i would go further out of the money now. i would buy an out of the money call spread and i wouldn't mind selling a put or a put spread. you do have to leave some -- you have to leave some margin in your account. >> it's a lot of margin, too, because apple is expensive. >> that's right. you have to be willing to buy

the stock. but if i buy it at $325 or $350, i'm happy to do that. i just have to remember that i was willing to buy the stock. >> i don't think this story is over. the fundamentals for this company are about as bad as they've been in a long time. when you think of that $60 billion buy-back, i think there is some downside support, somewhere twoeprobably near $40 again. i don't think you want to try right here. >> a retest of its lows? you see this back below $425 at some point this year. >> mike? >> yeah, the buy-back is really the reason you should feel comfortable selling the lower strike puts. i think it still works in the name though the stock is obviously up probably 50 bucks. >> all right, our thanks, of course, to carter. coming up next, call it the tragic kingdom, not talking about disney, but dan's bearish trade. how much more room can the mouse house run? we'll break it down when we come back. ♪

[ 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 ] ♪ [ 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. ♪

welcome back to "options action." we take a look back on trades gone wrong to see if we can right them. dan made a bearish belt on the magic kingdom. he hasn't lost that much money yet. here's why. on "options action," just because you risk less doesn't always mean you make more. and unfortunately, that's just what happened to dan's bearish bet on disney. dan thought disney shares would dip. >> the stock to consolidate or go lower. >> but do you really want to short the stock. >> go ahead. make a fool of yourself! >> dan, jiminy cricket is right. afterall, shorting any stock can expose you to infinite risk. so, to make a bearish bet, dan sold the may $62.50 strike call for $1.10. to keep all that money, dan needs shares to stay below that price or below $62.50.

above $62.50, profits will trail off. but dan won't see losses until disney rises above that call strike price by more than the $1.10 he took in, or above $63.60 by may expiration. >> oh, i just love happy endings. >> well, let's not get ahead of ourselves, because there is a trade-off. if disney shares trade above $63.60, dan will be on the hook for infinite losses. >> to infinity and beyond! >> that doesn't sound so good. to limit his risk, dan bought the $65 strike call for 35 cents and created his bear call spread. and here's how it works. between the $1.10 he collected by telling the lower strike call and the 35 cents he spent on what higher strike call, dan still pocketed 75 cents. that's the most he can make on the trade. but in order to keep all of it, dan needs disney shares to stay

below $62.50 through may expiration. above that, losses kick in, but they're limited to the difference between the strike of the call he sold and the strike of the call that he bought, minus the credit. but it gets even better. >> now i know i'm dreaming. >> because now, dan can do something that only exists in fairy tales. make money whether disney drops, stays flat or even goes slightly higher. since the time of the trade, disney shares have added 8%. making this trade a loser. and now "options action's" biggest fan -- >> this is great. >> only wants to know one thing. what will dan do now? before we answer bob's questions, perhaps this might make those that put this trade on feel a little better here. had you shorted 100 shares of disney at the time of the trade, you'd be looking at a loss of more than $500. if dan closed out his trade today, he'd be looking at a loss of $170. why is that? that's because the value of the call that dan sold has been offset by the value of the call he bought. big question now here, do you

keep this trade on and hope that disney will fall? >> this is all about hope. i rented myself a room in the house of pain here. the stock is up 18% since the beginning of april. i didn't -- i wanted to try to figure out a way to get short without being exposed with unlimited risk. it's been a disaster. now, i have to wait that week until expiration and try to cover it below the full value of the spread. >> what would you do, scott? >> there's no reason to take this off. you have to wait. the only thing that can happen is good. the problem with the stock is, it's way extended above all the moving averages, so, it's in no man's land. >> mike khouw, i'm guessing you're with dan in that you should wait on the trade and that disney is going lower. >> well, for sure you should wait on the trade because essentially, what you have on is something that's kind of like having that same put spread being long that put spread, so, you certainly wouldn't want to cover it here. disney is trading at a valuation that's certainly above its average. and i already expressed skepticism about the market strength. so, if anything is going to pull

back, you know, let's just hope it happens in a short period of time. >> the thing with disney here, dan, is that disney in today's session hit a fresh 52-week high. with a lot of media stocks, they are at this point. with the markets wanting these sort of juiced up names, do you think disney will fall if the markets are going to go higher? >> i hope so. >> hope's completely different than the question that i'm asking. >> i don't know what to say to people. if you want to buy disney after the stock just rallied 18% in the last month and a half, that's not a strategy that i can just, you know, feel good about. so, to me, i'm a trader and i'm looking for opportunities where i thought a lot of good news was in the stock at what i thought was a rich valuation, but i was wrong. >> you can't lose anymore money in this trade. there's no reason to take it off. >> that's true. a reminder here. if you want updates on our trades, be sure to follow us on twitter @cnbcoptions and dan posts regular update updates @riskreversal.

and you can check out facebook.com/optionsaction. coming up next, the final call from the options pits. ♪ [ 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 ] ♪ [ 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. ♪ you could say things got a little squirrely tuesday night in lawrence, kansas, as the jayhawks baseball team took on wuch that state. that's because a squirrel got loose on the infield. as you can see here, the runaway rodent wasn't going to be captured very easily. the squirrel tagged the second base bag . eventually, tyler baker used his batting helmet to bring the squirrel into custody and, talk about doing the right thing. he removes the squirrel from the playing field, runs down the exit ramp and releases the little critter safely into the parking lot where, then, he got run over. no, just kidding. he was find. time now for the final call, the last word from the options pits. mike khouw? >> you know, i think dan was on

the right track with disney. i think you can still look for opportunities to buy put spreads or sell call spreads there. >> scott? >> competition is eating mcdonald's lunch in this week's web extra. all about how to take advantage of that. >> dan? >> listen, if you want to short anything in thist ♪ my mission is simple, to make you money. i'm here to level the playing field for all investors ecigs there is always a bull market in summer ecigs i promise you to find it eci. hi, i'm cramer. this is cramerica. every night i come out here and help you find high quality stocks, well, that are worth owning. many stocks that i believe will reward you by either going