money, then things. now you stay safe. bye-bye.

and we can see that because the stock has not participated this year when everything else is rallying. that's why i'm interested in buying it. >> so mike is obviously bullish on deere tonight. he's doing that by selling a put. let's open the playbook to review how the strategy works. you want the stock to stay above the strike of that put before expiration. because you are short, you could

be forced to buy that stock at the put strike price, even if it falls below that level. and that could mean losses for you. mike, walk us through. >> this is really a simple trade. i'm looking at selling the july 85 puts. i can collect $1.50 for those. those have less than 60 days to go. if the stock lingers in here, stays above 85, i'm going to take in that $1.50 in premium that i sold. if it goes through that strike, i'm going to be compelled to purchase the stock that i like at its current price, at a discount. $83.50. a good discount to where it is trading right now. this is a good way to play the stock even just going sideways. >> we talk a lot of option trading strategies. this is a great option investment strategy. this is a great way to buy the stock at a discount and if you don't get to buy it, you get paid to wait and see if you buy it. so i love selling puts. if you want to buy a stock at a discount as an investment, this is a great way to get into it. >> let's bring in carter braxton

worth here, we do want to get his opinion on what deere's chart looks like and deere -- dear, does deere look like it's time for a bounce? >> it does. the chart is constructive. a very low beta name in a very well defined uptrend. it was able to break out. when you break out and fall back to that level, it's a pretty good rebound. note how well the stock acted today, down only 20 dips when the market is down 140. it's not really that heavily into industrials as it is an ag name and ag stocks act very well. we like it here. we think you have asymmetrical risk reward. >> so, carter agrees with mike. dan, do you? >> these guys are much less so than a caterpillar. they get a third of their sales from overseas, where cat gets maybe half or two-thirds of their sales overseas. i don't like the idea of making a dollar. this was a stock that was $7 higher just a few weeks ago.

you are selling a put right at very important technical level at what could be an inflection point in the market. i don't find it that compelling. i would give myself an opportunity to make money if we get a retest of the high. >> one part of the issue is that we are recognizing there is some weakness in the market and that will tend to bring all stocks lower. so, i'm going to allow this one to come to me. i'm not looking for this to be a breakout summer. >> deere bounced off that 200-day moving average. it bounced off that like it was a trampoline. >> let's wrap this up. want to buy shares of deere? that will run up $88 a share, but worst case scenario in mike's share, you could be forced to buy it at $83.50, and that's a 5% discount. let's move on here. facebook woes continue. shares tumbling more than 12% in may and falling below the key $25 level just this week. despite that, the stock is getting three analyst upgrades in the past two days, so, dan, what do you think for this stock? >> here's the thing. this story is one that's going

to unfold over years. and we've been kind of decidedly negative on it. but i heard something the other day that was really interesting. from kramer on one of the morning shows, where he said, this thing is being penalized because every other large cap tech stock, one of the biggest catalyst is their buyback. their dividend or the potential to distribute cash. fundamentals aren't great, but these guys are put in the penalty box. there's no new buyer in a lot of ways. so, to me, the analysts got opportunistic and they jumped in. when you look at the charts, it shows you, it was almost in crash territory, from the may highs, down 20% before the upgrades just the other day. 20% from may 2nd. it got a little overdone. this 24 area is a very interesting level that it has to hold and i think if you want to look out to the next identifiable catalyst, it's q-2 earnings in late july. >> it is interesting to me it is only at the very end of your bull case on facebook that you mention a catalyst being

earnings. >> right. >> and the whole other time, you talked about sentiment and technicals of the situation. is that enough? >> not for me. probably the biggest reason i don't like facebook is because you have a better alternative in google. the company is cheaper and it's staying power -- look at facebook. do you honestly think, when you look at that stock that ten years from now, it's going have the buzz around it? and right now, the buzz is -- >> all right. people. people. >> people. >> the options trade that we're going to discuss has a -- when we talk about bullish, it's setting up to be bullish. there's no -- >> let's walk through it. dan is buying a calendar call spread. a strategy we don't use too often. so let's crack open the playbook. bullish strategy. you buy a call and sell a nearer dated call of the first strike to reduce your cost. you want the stock to fall just below the strike of the call that you're short in the first expiration but above the strike of the call that you're long on the second expiration. this requires a bit of timing.

>> i think the stock is going to be range bound. it has to consolidate here. when is stock is 24.50 today, i bought the july/august $25 call spread for 58 cents. that's my maximum risk. i sold one of the july 25 calls at 97 cents and i bought one of the august 25 calls for $1.55. between now and then, this stock can move around. it can go up, down 10%. this value is not going to move a lot. what i want it to do is actually remain range bound and i want that july 25 call to expire worthless. what i do is, i own a much cheaper call for what i think will be the only potential positive catalyst between now and august. >> i will say this. i can't get behind the stock, but i can get behind that trade. >> oh. oh. >> these are trades that options traders like. you have time working on your side. if the stock hangs in here, you're going to collect the decay on that near-dated option. it will decay more rapidly than the longer traded one. so, actually, the trade, i actually -- >> i say kudos to the analyst

who got behind the stock when it was in a trough. instead of an all-time high. >> all right, got a question out there? send us a tweet. we'll answer it in our one-on-one web extra right after the show on our new website. in addition to scott's web extra, you have trader blogs, educational material and exclusive trades. check it out. coming up next, should you keep banking on the banks? we call to the charts to see if the financials can continue to lead. meanwhile, here's a look at what else is coming up on "options action." this trade underwent a beautiful metamorphosis. dan made a bearish bet on caterpillar and now he's in the green. >> wow! >> so, how can he build on his gains? find out when "options action" returns. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪

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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. ♪ financials were the single best performing sector in the month of may, doubling the markets gains over the course of the month. morgan stanley got a buy rating on the stock today. do the technicals line up? let's call to the charts with the one and only carter braxton worth. hey, carter. >> technicals look good. but let's look at a few charts and put it in context. this is a one-year chart of the standard and poor's 500.

what i have here is the investment bank index, which includes a lot of names like morgan stanley. all diversified financials. you can see the incredible outperformance versus the s&p. you have say, how could you want to chase morgan stanley here? let's reverse the time frame and make it longer. now look from the '09 lows. you have, of course, the market, well ahead of these banks which are still recovering from the crisis in many ways. and that's the opportunity, we think, with morgan stanley. it's up a lot and it's got much more to go. let's look at the chart itself. this is a one-year chart and what's important here is the authority of the 24 level. and how we broke out above that level and now we're quailing just a little bit above it. keep your mind on 24 and look at some longer term charts. that 24 level is also a break above the downtrend line that's bng if effect four of the past five years and if you look at the last chart, it's also a five-year chart, it's juxtaposed again, where we are now in relation to what you call a double bottom, and where i think we're headed, 30, 31. a lot of opportunity here. we like it and the stock was up

today in a very bad day for the market. >> yeah, and that was a good sign, certainly. mike, what do you think? >> you know, it's really hard for me to chase stocks that have had as strong a run as all the financials, frankly have. morgan stanley, also. the company has transformed itself a little bit. when we look at it, less of the trading revenue. more asset management over the course of the last couple years. even in a rising market, you would expect revenues to increase. the analysts did highlight the fact in a rising interest rate environment every 100 basis point in rates would translate to 20 cents worth of eps. and probably the barometer that we use to value financials, book value, tangible book per share, this thing is trading a little bit less than book value. and it think that usually represents a good buying opportunity for the financials. i mean, certainly, over the course of the last couple of years. that said, it's not my inkling to say, i'm going to throw all my money into the stock right here or even sell puts like i did in deere. >> but you are doing a very simple one-legged trade tonight. >> i am. and i'm doing one that's a

little bit more risk adverse. what i'm looking to do is buy the august 28 call, spend 80 cents for these things. and what i'm doing is risking very little money, 80 cents, that this stock could continue to rally. this is reflective of the concern that the sector that has outperformed. it is also playing into the fact that on a fundamental level, the stocks still do look attractive despite the big rally. >> i think they nailed it from the fundamentals to the technicals. i agree with mike. i don't like the entry point here. this stock has rallied 28% since the april lows. don't forget why it was down at 20 back in april. because the cyprus thing. remember europe, okay? >> come on. >> that's the thing. we haven't heard any issues about systemic problems in europe for awhile now. if that comes back, this stock is going to be back in the low 20s. >> that's what makes this a great stock replacement trade. i would look it as stock replacement.

we don't know how it's going to play out. this is the only way to be long. >> no, absolutely. you've made dollars at this point, you can take 80 cents of the six bucks you recently made and stay in a long position. if the market pulls back, if financials pull back, in a crisis emerges, you're basically hedged to the downside. >> it's a great strategy overall for all these financials that had their best month since january 2012. >> particularly the ones where the options can be dollar cheap. >> all right. dan, in terms of other financials out there, what are you watching? >> well, goldman is, you know, best of breed at this point. some of the bloom came off the rose of the jpmorgan situation. it's interesting that citigroup got very hard-hit today. one of the worst performers. this is one of the best performing groups in may. it's part of the cyclical rotation, the money was moving into. we saw how this came unwound in the staples and the utilities. so, i don't think you want to jump in right now as far as the sector is concerned. let them come back to you. >> that's not just true here, it's true for the insurers, too.

aig another one that looks fundamentally cheap. i think stock replacement makes sense there. >> our thanks, of course, to carter. coming up next, building on gains in caterpillar. dan's got a winning trade on his hands and he will reveal his strategy for locking in even more profits when we come right back. stay tuned. ♪ [ 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. ♪

welcome back to "options action." time now for the upside call. we look back at some of our winning trades. dan made a bearish bet on caterpillar. the stock has slid a bit. dan's made a lot, and here's how. on "options action," it's how we construct winning trades. risk less so we can make more and that's just what dad did with his bearish bet on caterpillar. dan thought shares of cat were looking pricey. >> i think a lot of bad news was in the stock there. i don't think it is now. >> but just shorting the stock, not so fast. after all, shorting caterpillar or any stock, for that matter, can expose you to infinite losses. so, to define his risk, dan instead bought the july 87 1/2 strike put for $3.505. dan needs shares to fall below $87.50 by more than the cost of

the trade, or below $84.45 by july expiration. shelling out $3.05, what kind of a risk to cat do you think you are? >> i'm the only cat of my kind. >> come on, dan. let's do this for less. >> i sold one of the july 85 puts. >> that's more like it. so, to cut his cost, he sold the july 80 strike put for 90 cents and created his put spread. but he did something better. he made making money easier and here's how. between the $3.05 he spent on that higher strike put and the 90 cents he collected, he cut the total cost down to $2.15. instead of needing shares to drop below $84.45, dan now makes money if cat falls below that higher strike put by more than $2.15 he spent, or below $85.35 by july expiration. >> we did it! >> not so fast. there is a trade-off.

by receiving that lower strike put, dan has capped his gain between the strike of the put he bought and the strike of the put he sold, minus what he paid for the trade. and since the time of the trade, cat shares have dropped 2%, making this trade a winner. and now "options action's" biggest fan -- >> you'd have to be pretty dumb to find this stuff funny. >> just wants to know one more thing what will dan do now? before we answer that, let's just see how much money was made. had you shorted caterpillar at the time of the trade, you'd have a 2% return. but dan's trade cost $2.15 and can be sold today for about $2.75, that's a return of about 25%, so, that's even better. dan, still some time before july expiration. you stick with this? >> yeah, you do. here's one thing you have to keep an eye on. they're going to report after july expiration, so, you want to be very cognizant of that. at some point, if this thing breaks 85, i'm going to take it off, especially if i can get a double. you take the money and move on. >> yeah. mike, what would you do? >> no, you do stick with this.

the market is also telling you to stick with it, too. it's working your way right now. and put spreads -- this is one of those situations, you sell the more expensive option. that's what you want to do. i like the trend in it. >> it's working, the trade is working, the whole market is working in this direction. i don't know why you would take a winner and cut it short. >> and i make one less point. why do we have carter spend so much time on the technicals here. 85 is a huge support level and the strike that i sold, the 80 level, is like long-term support. so, we have this thing right where we want it, almost, somewhere in the mid-part of this spread and when up get to the lower strike, that's when you take it off. >> reminder here as we head to break, if you want updates on our trades, be sure to follow us on twitter. @cnbcoptions. dan posts on twitter, as well. finally, if you are on facebook, check us out at 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 ] [ 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. ♪

♪ >> oh, my. penguins of african origin got dressed up to welcome african leaders to japan today. they donned african costumes to parade around the amusement park where they live. the parade took place before the tokyo international conference on african development. the conference aims to promote interaction and cooperate between african leaders and potential development partners. it will take place june 1st to june 3rd if you want to go. that is tonight's addition of optional viewing. i would go to see the penguins in the little tiny costumes. >> long way to go. >> anyway, time for our final trade. penguin hater scott nations. >> this week's web extra is a trade on dollar general. what to do and what not to do. in front of earnings. >> dan? >> i'm not a facebook bull, but if you want to look out to late july, see what the next positive catalyst, call calendars could make sense. >> mike?

>> i think looking at stocks substitution strategies is the way to play it. >> our time has expired. for more options, go to our website. see you next friday for more "options action." have a great weekend. what you are about to see is one ladder-the strongest, the safest, the most versatile ladder in the world. the strong and sturdy little giant ladder system. twenty four ladders in one. coming up, you'll see amazing demonstrations and hear compellingti