thing that i want you to remember when it comes to your money. it is this. people first, then money then things. now you stay safe. bye bye. this is options action. tonight, get your group on. carter has a way to make money in groupon if the stock goes up, down or nowhere. plus, what is this guy talking about? >> about two weeks ago, i bought a january 400 call. sold the january 460 call and i sell the january 325 put, zero. >> nice. >> no question. >> we'll give you the scoop on the apple trade and show you how to make money, too.

not loving it. scott nations explains why people are bearish on mcdonalds. in the heart of new york times square, these are the traders here in beautiful los angeles. the markets continue to make new highs. there's one name you need to watch. that is dow component caterpillar. they are down more than 1.5% today alone. this as the s&p 500 defies gravity. they are flat on the year. is this a warning to the world or a buying opportunity? let's find out now. dan, what's up with this? >> i think it's a good warning here when you think about what's going on in the market. the u.s. is a safe nation. we hear people say crowd into the names with a lot of u.s. expose sure, not to emerge into new markets.

cat doesn't fall into that. they get 35% of their sale from the u.s. the rest is subject. the world thinks it's going higher. i think it's a main reason for the underperformance today. >> when you look at the chart, cat looks like it's trying to make a recovery or at least move back to what the market is doing in terms of going higher since mid april or so. i think it's up 10% since then. >> among the dow industrial, this has the highest short interest. it remains low. looking at caterpillar and names like deer, what you have are a number of names that are trading at valuations that reflect a global growth story that is weak despite the fact we have monetary policy that should be inflating stocks. this stock is trading at a cheap multiple to the historic on a pe basis and trailing. i think what's going on is if you own stocks, you feel like you want to go into the name that is look attractive.

obviously, if the global story is challenging and they are earning their income it's going to pressure the results. >> the other piece of the equation is cat sells a lot to miners. what is going on? >> that's right. dan mentioned dollar strength is a problem for caterpillar for a couple reasons. if you are going to use a cat machine to dig up ore, it's not working for you. it hurt bonds today. it killed bonds today. i think that actually may be good for the overall market. it's a problem for cat. i think deere is interesting. mike mentioned deere. deere was up a little bit today. that tells me the problem has to do more with if they are exporters. the fact that boeing was also down today tells me the problem is with exporters. >> dan is bearish. he's doing a put spread tonight. here is how it works.

buy a put then another of the same expiration. do it when you are bearish. that's where you make the most money. it's where your profits are capped. dan walk us through the trade. >> you made good points. i don't think cat is a great short on the evaluation. if the market is going to rotate at some point the stock is going to work. right now, a near term basis, it rallied 10%, 11%. i think a lot of that news was in the stock there. i don't think it is now. i want to use a defined risk there. today, when the stock was 88.5, i bought the july put spread. i paid 215 for it. that's my max risk. i bought for 305 and 90 cents against it. i can make up to 535 on july expiration and below 80, which

it just was a month ago, i make the full 535. max risk 215. this is a defined risk way to play for and retest the $80 level. >> mike, is this a trade you want to get into when there's a rotation toward cyclicals? if there's global growth, this is one that's going to play catch up. >> i think that's a great point. the stock that is look like cheap valuation names and people want to put in capital, that said, this is kind of a time of year when you might expect to see weakness. we have had a strong market. if all stocks pull back, this should affect this one. one reason you want a put spread is you want them to kick in. it's likely to make a downside. i like the way he's playing it here. >> i like the volatility. caterpillar is relatively cheap on a historical basis.

we like to look at what they are paying. it's great given that he's at the money put. >> let's wrap this up. little stocks versus options here. that could scratch your port foal low. dan's put spread defines to $215 and can triple his money by july. let's move on here. one man's trash is another man's treasure. barnes & noble and luxury watch maker fossil posted impressive gains. is this a sign they are broadening out? let's call to the charts with a man who some consider a national treasure in the chart world. carter braxtonworth of oppenheimer. >> advertising stocks like yelp and zinga. this one is next. ipod at 30. a wipe out down to two.

you have broken out above this which is 6.25 right now. the next is another way to draw the lines. a rounding bottom. it's the same chart starting at 30. or you can rely on this mechanism. the next chart the share price. once that goes flat, you have a good sign that something has been bearish, is reversing. we have lots of upside here. a little downside. >> let's go to mike. you are a sucker for smoothie mechanisms. >> they don't have enough of a history to go back too far. one thing we noticed is they have not made money. after they got rid of andrew and ted and eric took over, they are stabilizing a bit. at 35 times that number, the stock is looking, you know, kind of rich here on a fundamental

basis. if they stabilize the business, sales come out better than expected. they are taking a little bit of market share away from living social and google. the mobile side is up from 35% a year ago. they have been making that transition effectively. if the company is going to get traction, now looks like the time. >> mike, tonight, is selling a put spread. let's go through the difference here between the trades. dan's bearish trade, selling is a bullish strategy where you sell one and buy a lower one to protect yourself. the goal, you want your stock to trade above the short put strike on expiration. that way you can keep the profits you took in. should it fall, you see losses. they are capped at the strike of the put you bought. mike, walk us through this trade. >> i was looking at the july 6, 5.5 put spread. this is not as narrow as it might otherwise appear. i'm selling $6 puts for 48

cents. i'm taking in a net credit of 20 cents. that's 40% of the distance between the strikes here. the nice thing about a trade like this, if the stock languishes here, the market pulls back, i could still collect that money between now and expiration if the stock is put to me, i am protected at lower levels, risking 30 cents on the trade. >> to me, what carter said about the risk, that doesn't lend itself to a put spread. i don't think it's a bad options trade. if you are bullish -- >> like what? >> volatilely high. if you think there's a takeout, there's other ways to play with 10% short interest. to me, if you want to put on an options trade, great. if you are playing that's not the way to do it. >> you scale your trade -- you scale your trade appropriately. what you are taking in is 20

cents over 30 cents risk. we are looking for these situations. there are not a lot of them where you sell premium in this market and feel comfortable about it. it's a rare case at this time. the other thing, look, we have done trades like this on similar names. it's hard for me to commit on a name where fundamentally i'm not feeling as strong and going out and buying premium. >> the stock has to drop double digits. if the stock is between those strikes of expiration, you are going to own the stock. if it's there, i don't want to be an owner of it. >> maybe things could have worked out better for groupon. risk over $600. worst case scenario, mike is looking at a loss of $30. interesting risk reward. got a question? send us a tweet. we'll answer it after the show on our website. check it out. scott has a bearish trade on mcdonalds.

you'll find great educational material and trader blogs. next, how a hedge fund manager made a killing in apple using options. we'll explain how he did it and how you can do it, too. that's next. well, that wasn't so magical. dan made a bearish bet on disney. the stock flew higher. find out when we return. ♪ [ 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.

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i had a great trade, actually. about two weeks ago, i bought a january 400 call. so sold the january 460 call and sold the january 325 put, zero. >> nice. >> no question. took out about $30. >> that was legendary investor from las vegas talking about his bullish trade in apple. you might be saying what is he talking about with all the puts and calls. we are going break it down here. basically, he is doing what's called a call spread risk reversal. he used that money to buy the 460 call spread. he did it with no money. he can make $60 by january expiration. because he sold the put, he must be willing to buy apple for $325. even if it goes below that

level, of course. dan you are active in apple. >> on a mark to market basis, if the stock went down toward the 325 strike, remember, the options market, if you have done that before, it was pricing an 8% move. it does not get you down to 325. he seemed conservative about that. what i would say for the viewer, it's a great, great trade. when we say it's for free, it's not. if the stock goes against you, you have losses. one of the ways to modify the trade for the people out there is sell a put spread to buy a call spread and define your risk. that way, you don't have the risk to the downside. >> mike? >> yeah, i think the biggest change i might have made to the trade is shortened up the duration a bit. when you get net short options over a longer period of time, it's harder to realize. if he bought the stock at $325, it's shaving $100 billion off compared to where it is now. it puts the value at 180 bucks.

4.5 times earnings. that's why he's drawing the line in the sand. you have to back the truck up at that level. it's smart to play in names that don't have a lot of leverage. >> let's look at the chart on apple. do you like the levels here? where do you see the stock going? >> we think it's a great trade. the stock has upside. seven months down, mid september to mid april, 50% decline. here is what happened. we broke above trend. we never went below where we broke out. all the hallmarks bearish to bullish. we think 520, plenty of upside. >> what kind of trade would you put on given what carter is saying? >> in apple you can buy a call spread. you can do what he did. i would go further out of the money now. i would buy an out of the money

call spread and wouldn't mind selling a put or put spread. you have to leave some -- you have to leave some margin in your account. >> it's a lot of margin because apple is expensive. >> if i buy at 325 or 350, i'm happy to do that. i just have to remember i was willing to buy the stock. >> be careful buying too far out. the fundamentals for the company are as bad as they have been in a long time. i think there's some downside support somewhere near 400 again. i think you probably get a retest. i don't think you want to try here. >> a retest of lows? >> back below 425 this year. >> mike, what are your thoughts on that? >> the buyback is why you should feel comfortable. the risk reversal works. it's up 50 bucks. >> our thanks to carter

braxtonworth of oppenheimer. now talking disney and dan's bearish trade. how much more room can the mousehouse run. we'll break it down. ♪ [ 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.

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welcome back to options actions. we take a look back on trades gone wrong to see if we can right them. dan made a bearish bet on the magic kingdom. the stock moved against him but he hasn't lost much money yet. here is why. just because you risk less doesn't always mean you make more. it's what happened with dan's bet on disney. he thought shares would dip. >> consolidate or go lower. >> do you really want to short the stock? >> go ahead, make a fool of yourself. >> dan is right. after all, shorting any stock can expose you to risk. to make a bearish bet he sold the may 5250 share. he needs shares to stay below that cost or below 62.50. above, profits will trail off.

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

the difference between the strike of the call he sold and the strike of the call he bought minus the credit. but, it gets better. >> now i know i'm dreaming. >> now dan can do something that only exists in fairytales, make money will disney drops, stays flat or go higher. shares added 8% making this trade a loser. now options actions biggest fan only want to know one thing, what will dan do now? before we answer bob's questions, perhaps this might make those who put this on feel better here. shorted 100 shares of disney at the time of the trade. a loss of $500. if dan closed out the trade today, it's a loss of $170. because the value of the call was offset by what he bought. do you keep the trade on and hope disney will fall? >> this is about hope.

i have room in the house of pain here. the stock was up 8% so i put the trade on. it's up 18% since the beginning of april. i wanted to find a way to get short without unlimited risk. it's been a disaster. now i have to wait the week until expiration and cover it below the spread. >> what would you do, scott? >> you have to wait. the only thing that can happen, the problem is it's way above the moving averages. it's in no man's land, technically. >> i guess you are with dan and you should wait on the trade and disney is going lower? >> for sure wait on the trade. essentially what you have is like having the same put spread. you certainly wouldn't want to cover it here. disney is trading at a valuation that is above its average. of course, i have expressed skepticism about the market strength. if anything is going to pull back, let's hope it happens in a period of time for the trade to

work out. >> disney hit a 52-week high. a lot of the stocks are at this point. the markets going higher and wanting the do stuff names, do you think disney will fall if the markets are xwoung fo go high sner. >> i hope so. >> hope is completely different. >> i don't know what to say to people. if you want to buy disney after the stock rallied 18% in the last month and a half. it's not a strategy i can feel good about. to me, i'm a trader and looking for opportunities where i thought a lot of good news was in the stock, a rich valuation but i was wrong. >> you can't lose anymore money. >> true. >> a reminder, as we head to date, follow us on twitter@cnbc options. if you are on facebook, stay posted on trades from throughout the week on facebook.com/optionsaction.

next, we have the final call from the ongss pit. ♪ [ 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.

all o[growl]orswim. we used to live with a bear. we'd always have to go everywhere with it. get in the front. we drive. it was so embarrasing that we just wanted to say, well, go away. shoo bear. but we can't really tell bears what to do. moooooommmmmm!!! then one day, it was just gone. mom! [announcer] you are how you sleep. tempur-pedic. ♪ [ 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 at the baseball team took on wichita state. a squirrel got loose causing a brief delay. the run away rodent wasn't going to be captured. he tagged the second base bag. wichita state's tyler baker used his batting helmet to bring the squirrel into custody. he removes it from the field and releases the critter into the parking lot where then he got ran over. just kidding, he didn't get run over. last word from the pit. mike? >> dan was on the right track with disney. look for opportunities to buy

put spreads. >> scott? >> competition is eating mcdonds for lunch. it's about how to take advantage of that. >> dan? >> if you want to short anything in this market, put spreads. >> our time is expired. i'm melissa lee. "mad money" starts right now. >> announcer: the following is a paid presentation for the amazing perfecter fusion styler, brought to you by tristar products. [♪...] what if there was finally one perfect styling tool... one that takes short, flat hair and adds instant lift and volume... >> oh, yeah, oh, yeah! >> announcer: ...brings dull, damaged hair back to beautiful life with incredible shine and body... >> we're just brushing in the shine, right? >> yeah! >> announcer: ...and even transforms frizzy, coarse hair to straight and smooth hair? >> audience: wow...! >> announcer: sound amazing?