this is "options action." tonight, dr. doom strikes again. >> i think lower than today. maybe 20%. >> a bold warning about the '87 crash is burning up the web and freaking out wall street, and a shocking chart shows he might be right. we'll tell you how you can protect your portfolio for free. plus, how high. ♪ i can kiss the sky >> no, not those guys, this stock, because tesla continues to defy gravity, and we'll tell you why it could go even higher and why were all the options traders in a tizzy over this

crazy hamburger? it's a fast food hamburger that could mean money in your pock. the action begins right now. live from the nasdaq market site in new york city's times square i'm mel la lee. these are the traders here on the desk. the board room brawl playing out on cnbc that's sending shock waves across wall street and main street, and that is jc penney. bill ackman calling for the replacement of the retailer's chairman and calling for a new ceo. the board struck back one of the largest shareholders, perry capital through its support of ackman and howard schultz took the other side on cnbc and scolded the hedge fund manager. how will this play out, and can the company survive? let's get in the money right now and any way you slice it it's an extraordinary story being aired on tv in the media, in the public spotlight for all to see. >> and it's not a good thing, not good for the shareholders who are not big hedge fund titans. yesterday with the news they put a time frame on it. should have a new ceo in 30 to

45 days. that's also not good. if you get close to that time line, and there's no real names bandied about. that's a problem for investors. the stock can continue to sink. we've seen what's going on in the credit markets, not good. i mean, the story is becoming very distressed kind of quickly, and you don't really want to be an individual investor trying to get in the middle of these big guys. >> anything that ackman is involved in right now that isn't playing itself out in a very ugly way in the media? i mean, every story is a bad one for him as far as this goes, too, but for him to start looking for any kind of a management change right now, kind of lost credibility the last time around. i think when ron johnson left, it basically said, you know what, ackman had a flawed strategy for jc penney. i'm not necessarily that's true but we never got a chance to find out. jc penney was a declining story before johnson got into play. >> did have a chance to find out. they lost and burned through $1 billion in cash in the last three months. >> what he was trying to do was reinvigorate the brand and turn around a sinking ship. it was sinking slowly.

>> right. >> but obviously needed big changes. anybody who had been into a jc penney realized that, now you've got a business doing close to $18 billion in revenues is now down aron 13. >> doesn't that legitimize what ackman is saying, before if ackman was saying we want this person as a ceo, you got it wrong the last time but now that perry capital is involved there's someone else. >> one guy on his side and mike makes the point that this is playing out in public. everything ackman is involved in is playing out in public and everybody except for perry capital is against it. mr. ackman, when everybody has a problem with you, you're the one who has the problem, and people are lining up for the bearish case in jc penney. >> speaking about playing out publicly, take a listen to who howard schultz had to say in an exclusive interview with maria bartiromo on the "closing bell." >> for ackman to do what he's done the last 24 hours, it's not only irresponsible, but it's destructive debehavior, and if i was sitting on that board, i would be asking for bill ackman's removal. >> it does seem to go against

the interests of the company for bill ackman to act so publicly and in such a manner releasing a letter to the public at the same time as he's releasing it to his fellow board members. >> i think it's an act of desperation, plain and simple. a lot of things going against him right now, and frankly jc penney -- one of the stories has to turn around quickly or he'll lose all credibility everywhere he's playing and really who he needs to show he's doing something to is his own investors, and i think that's who he's trying to play to right now. >> need to check the charts, bryn in carter braxton of oppenheimer. in today's session, this is at least a 12-year low here in jcp. >> it's quite poor and actually speaks to the wisdom of price. let's say this didn't have jcp on top, and it was just any chart. the chart tells you something is wrong with the business, and, in fact, it's been going down for two years as the stock market has been going up, so the relative strength is atreshs. tracking the trend line beautifully, fails every time it gets there and hovering right at these lows at 12. take a look at the lock-term

charts, exactly the lows of '09, of about two years ago and where we are now. we think this breaks sharply and has plenty of where to go. the short interest is huge, so what. it looks like it's getting much worse. >> huge, 18% huge. mike? >> fundamentally, if you drew a graph of the revenues of this business since 2007, it would look almost exactly like the price chart graph that you just saw. now, i strongly believe that this company actually needs to change its business model. mike ullman trying to bring it back, as dan was pointing out, an effort to salvage the balance sheet more than anything else, just stabilize a sinking ship in this case, but it is still sinking, and that's the reality and trying to bail it out isn't going to work. they have to change the structure of the business. won't make money this year or next year which means the balance sheet will get that much worse. whether or not you believe the citc business, whether they are losing their funding, that's not issue. they have to turn around quickly.

>> from a trading perspective it won't take a whole heck of a lot to get this stock back up to the low teens, if there is any good news, the sentiment is bad and this sets up for a dangerous short for people who want to enter it here. >> mike obviously is bearish. he's selling a call spread. let's crack open the "playbook" and see how this works. bear strategy, purchase a higher strike call on the same expiration. want it to change by the short strike by expiration. above that level you will lose money the losses are capped at strike of the call that you bought. mike, walk us through this trade. >> looking at selling the september 13 and 14 call spreads, with sell the 13s for 95, take in a ned credit of 40%. basically the idea here is i get to collect some premium if it continues to trade around. the math, much like it does in put spread, works in trade like this, and even if it does in the near term happen to spike.

as dan suggested, it's not going to go to the full $1 of the distance of the strikes unless you carry it all to the volatility. >> up another 15% today, express your point of view by selling your options or option spreads and because mike is in calls he has to sell a spread. one thing, a bunch of the jan $10 puts traded on the close, you see that stock below 8.60 so mike has the sentiment and trend on his side. >> would you say this is an adult name to play and noam matter equities or options in. >> equities definitely the option. there's lots of opportunities. i took the opposite, long an august fares khallafalla-. they have their earnings and will come out on the 20th. the worst news right now is in the stock, and you may have an opportunity for the thing to pop in the next couple of weeks. >> he's going to get tested. >> being long that calendar is a short premium trade in the near term. >> carter, what do you make of that $14 level? >> that's the key level, and we don't think -- we're hovering at 12. here's the interesting thing about this.

let's pretend this was best buy or something else that was maybe going to go bankrupt in turn. if one is going to start to get long, why gamble here? wait until it starts to turn. there's plenty of upside if it's not going out of business but buying it here is nothing short of reckless. >> all right. maybe jc penney's fortunes would have been better if they simply added a little stocks versus options. while tempting shorting any stock even a battered one could lead to unlimited actions, mike's option trade nets him $40 and can make money if jc penney shares go up or down or nowhere in that matter and the most can you lose is 60 bucks. got a question, send us a tweet and we'll answer it. tonight scott has a way to hedge your portfolio from rising rates. in addition to scott, you'll find great trader blogs, educational material so check it out. here's what's coming up next. dr. doom says we're heading for an '87-like crash, but the charts say it could be even worse. carter dives in with the shocking chart everybody needs

to see. plus, it's electric. last night mike made a bull iis call on tesla so how can he make even more money? 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.

♪ [ 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. ♪ in '87, we had a very powerful rally, but all the earnings were no longer rising substantially, and the market became very overbought and the final rally into overstrength

occurred with diminishing number of stocks hitting 52-week highs, and if you look at the last two days, it's remarkable. we're close to the old time high at 1,709 on the s&p and yet yesterday and the day before there were 170 new 52-week lows. that's a very high figure. >> that was dr. doom himself on the online sensation features now warning that the market is looking eerily similar to what it looked like leading up to the crash of '87, and according to the charts, it not only resembles 5087 but some other equally dire days for the market, so we've got a call to the charts to find out why. go straight to the man himself carter braxton worth of oppenheimer. >> '87 is so draconian because it was so fast, all in one day

but the principle is this. tops have a look and feel over and over and breath starts to wane and then the trouble ensues. in fact, what i've got here are several tops. a recent top and epic tops, and you'll see that the similarities are quite the same, so let's look at a recent period of trouble. what i've juxtaposed is the current two-year market against where we were into the top of may 2011 before the u.s. got the downgrade, stripped by standard & poor's of its aaa rating, and basically he plunged from may to august about 20%. that's a fairly benine thing, 20%, but it's the shape and look of the ascent that precedes the drop that's important. with that, let's look at epic tops and see how they also are quite correlated so let's go back to 1937. of course, we had the '29 crash and spent the most of the '30s coming off the lows but then we encountered trouble in '37. frankly in february, and we plunged basically 50% through to

the end of the year. what's important, again, is the correlation with the current two years that we're in right now. it's about 90 plus%. take a look at a 68. in 1968, a very similar two-year trajectory just like the one we're in now and then the trouble started. in this case it was december of '68 and over the next 18 months, a little bit longer we dropped about 40%. now, let's lock at a 87, and it's -- it's the same thing. in fact, of those four or five periods that i've cited, the one that's the most correlated, running at a 96% correlation is this one, and if you just pokes the current two-year s&p against the two years preceding the crash in 5087, this is the overlay, and so does it have to play out that way? no, but it really does speak to what is one playing for by staying long? is it, a, symmetrical risk reward? we think so. upside is limited and by staying in you embrace or perfectively take the punishment that is coming, yeah. >> all right.

pretty scary stuff here, mike. >> yeah, and it's interesting. i last week, maybe a little bit prematurely, felt that buying spi puts was the call, but, you know, you look at something like that and you can't help feel but uneasy. what we also feel uneasy about is overall growth is not that stellar and we have the fed still with their foot on the gas pedal. concerns about tapering suggest can we keep up even relatively anemic levels of economic growth of 2% without that kind of stimulus behind it, and the troubling thing, of course, is if we don't, equities are obviously going to be under a lot of pressure. >> if i'm the long market right and i'm sitting at home i want protection, how do i do this? >> right. a lot of people who are somewhat sophisticated oftentimes like to lower their exposure to a down move by sometimes just selling an etf, like a spy if they have a portfolio, long portfolio that's heavily correlated to it. you mow, to me, i don't really like doing that because like carter said, when you talk about what the risks are here, they are not really, you know, that

symmetric, probably have a few percent to the upside but could have potentially a really sharp down 10% move. what i like to do is sell an out of the money call and use the proceeds to buy a put spread. do not be buying puts all the time against your p.you'll just kill your returns so this you do at an infliction point. carter thinks we're at an infliction point. >> i think this is absolutely right. another problem with 5087 is the fact that the u.s. government threw in the towel in supporting the dollar. the sped about ready to throw in the towel so i think you have to have some protection. mike? >> first of all, one of the things in the type of strategy he's articulating here that i really do like, you still preserve a little bit of upside. you know, you're not getting naked short the market which i also think is exceptionally risk, and also time is working for you here. longer dated options out to the end of the year are higher priced than the ones we have right now. the wing options you would otherwise sell, those things will decay away. that really helps you. >> let's be clear, dan. why don't you walk through the legs of the trade.

>> first quarterly, last day of the year, when the stock was at 169 you could sell. december 31st, 135 call at about 250. you could buy the december put for $5 and sell a further strike put, the 154 put at 250. that doesn't cost you anything. you basically don't get short on december expiration up until 175, up $6 and 165 to 154 protection. that's down almost 9%, 10% back to the june lows. i think that's a good level where if we do start to go down, we probably pause. >> if you want to see the full marc faber interview logon to features.cnbc.com and find a lot of great articles there as well. coming up next, it's a bird, it's a plane, it's a rocket. it's the shares of tesla and according to our guys this rally just might be starting. we'll explain why when we come back. >> time for pump up the volume.

the names that are heating up options traders sizzling index. would you like fries with that? this company is the best performing fast food restaurant so far this year, and after releasing its new signature pretzel bacon cheeseburger last month, the stock shot to record highs so option traders hopped this their cars and hit the drive through making big bets that this stock will continue to outperform. the answer, when opti"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.

♪ [ 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. ♪

where were option traders pucking up the value this week, wendy's. you just heard how wendy calls were active, and, scott, why was this, and have you tried the pretzel bacon cheeseburger. >> you haven't. >> this was on wednesday, stock was up 5%. $8 calls, some say it's because the brand will do a new twist. >> pretzel bacon cheeseburger. >> a look back at some of the winning trades. few stocks capture the imagination like tesla does.

here's how they did it. on "options action" it's how we trade like scientific jean justes. risk less so we can make more and that's just what mike tried to do with his bullish bet on tes [ laughter ] mike was on the fence about tes larks but then carter made a crazy comparison to amazon. >> wow, tesla plus amazon with some voodoo, i've got to get me some tesla but not so fast. 100 shares will set you back almost $14,000. the january 150 strike call was bought for 17.75 and now to make money mike needs shares to rise would have 150 by more than the 17.75 he spent or above 167.75 by january's expiration. >> i'm going to read your thoughts. >> no need, doc, i'll tell you what i think. we need to do this for less. >> sell the september 150s against it. >> to cut his costs he sold the september 150 strike call for

850 and created his hall calendar but did something even better. he put the odds in his favor, and here's how. between the 17.75 he paid for the longer-dated call and the 8.50 he's collecting by selling the shorter dated call, mike cut the total cost of his trade down to $9.25, and now instead of needing tesla shares to rise above 167.75 to make money, mike sees profits if tesla shares rise above his strike price by more than the $9.25 he spent or above 159.25 by january expiration. but it gets even better. that's because the value of the nearer dated call that mike sold will decrease faster than the value of the longer dated call that he bought letting him do something that would impress doc brown himself, turn time into money. >> what did i tell you? >> well, let's not gloat yet because there's a trade-off. in order to make the most money,

mike needs tesla shares to stay below the strike of the shorter dated strike he cold before the expiration but before the strike of the longer expiration that he bought by more than the total cost of the trade by the second expiration or in this case above 159.25 by january expiration and since the time of the trade tesla shares havies weren more than 10% on earnings. >> do you know what this means? >> we sure do. it means that mike's trade is looking fine. and now "options action" fans have only one question. >> are you telling me that you built a time machine out of a delorion? >> well, not that question. what they are really wondering is what will make and carter do now? >> all right. before we answer that lets just see how much money was in fact made. had he bought 100 shares of tesla at the time of the trade you would have made 12%, not bad. mike's option trade costs 9.25 and can be sold today for $14 so that's a return of 35%, even

better. so before we get mike's next move, carter got us in, so we go back to carter and see if you still like the chart. carter. >> we do in the sense we think the road map for the stock is much, much higher like amazon and instant gratification is good as well so day to day and hour to hour we would capture the gains. >> capture the gains. would you capture the gains? >> you know, one of the reasons we actually got gains like in in a relatively short period of time is because of the news that came out on the stock this past week. it went right to the strike which is exactly where we want it. in an ideal world we can sit here and look to collect the premium over puts that exceed december expiration. i'm inclined to go with carter saying we had a nice gain, it worked out. let's take our profits and run. >> what would you do, dan? >> i'm kind of with carter. i think the story will continue to go. you may have a little exhaustion on the buy side. 25% short interest. a lot of good news. i think you want to see it fill in the gap. maybe towards 130 that would be a great re-entry point. >> scott, would you be tempted

to put on a directionally short trade on this name at this point? >> no, not with your money, and the thing is let's point out how calendars can be bearish or neutral or bullish and this did exactly what it wanted to and went right to that strike, a bullish calendar, but now the stock is bouncing around so much, you still have a month to go, that i think you have to take it off. >> if you want updates on our trade follow us on twitter at cnbc options and dan and his trades can be followed at risk reversal or at facebook.com/optionaction. coming up next, the final call from the options 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.

♪ [ 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. ♪ we want to thank carter from oppenheimer and say a special hello to toby worth who were good enough to stop by, now we know where carter gets his good

looks from. >> be long spi and if you are and don't do this you're a dope. >> dan? >> i wouldn't say a dope but you look for low premium ways to buy protection here. >> mike in. >> one of the things about his trade we didn't actually discuss is the fact that you'll still get the dividends. that adds up another two bucks. >> all right. i'm melissa lee. have a great weekend. >> announcer: the following is a paid presentation for curl secret by conair. hair goes in. curls come out. hair goes in. curls come out. curl secret is the first styler that curls the hair for you. hair goes in, and curls come out. you'll get beautiful, long-lasting curls every time. and it locks in the curl and shine for hours on end. so now you can get salon quality results at home with quick and effortless shiny curls. and it's from conair, the people you trust with your hair. >> [ gasps ] >>ho