. >> this is "options action." tonight, wall of worry. syria could send gas prices soaring, crimping wallets everywhere. so what would that mean for the largest retailer? mike ko will break it down. plus heart trouble? no, not that kind of trouble. we're talking about ford. krth carter worth, shares of the auto giant are about to head into reverse. hemoexplain why. sfreek e freaking out about the market. relax. because scott and brian have a way to protect your portfolio for penneys on the dollar.

the action begins right now. right from the nasdaq markets at new york city's time's square, i'm mellissa lee. these are the traders. right now, fear is a bull market t. index is at a two-month high up 40% from its august lows between syria, fed tapering, the return of the debt ceiling debate, are we setting up for a september swoon. let's start this conversation off u off with our own residents merchants, brian, what are you seeing? in particular, what are you seeing in the out months, not only september but october as well. >> we see a rise in volatility. you seen the graphics. it has popped. basically, what you are seeing here is volatility rise, people getting nervous about the situation here. we saw that start to trickle in the small caps a couple months ago. we saw volatility and fear rising in the small caps. it's starting to pill over right now. certainly, august was a horrible month for the markets right now.

are you talking about the s&p down almost 3% on the month. the dow don't even worse. certainly, that is going to capitulate some fear. i don't think we seen all that fear hit this capitulation. we haven't seen that vol fit spike we normally see in october and november. >> it's interesting, one of the things about that strike, we are going into an extended weekend. you take a look at these numbers, what is interesting the way the calculation is done this understates how much options premiums are in there. >> just to back it down, vol estimate goes ahead a bit. >> we got a slow week into labor day, you got the labor day weekend. of course, we have a lot of things going on. the other thing i would point out is premiums in single stocks actually have not risen quite as rapidly as they have in the broader index. when index premiums are going up, that's concern that correlation is rising. all risk assets could be sold. itself the kind of risk. that's what that means.

it also provides opportunities, if you are looking to make directional bets in single stocks, you might be able to boy options. >> in terms of historically what the stockmarket has done in reaction to bombings into military threats, the historical reaction has been to sell the threat and buy the bomb. in other words the markets go up once these strikes actually happens, so how do you you sort of reconcile that with what it is telling us the. >> i think it's important was it is telling us above 17 particularly in front of a three-day weekend. i think it's important, though, the iwm, implied volatility was up four times the that. the market thinks small caps stocks will have a tougher time. what do you do? we say on the show, buy protection when you can, not when you have to it. you know, it's not unamerican to buy protection, you are worried about your portfolio. we are talking about this, syria will be a two-week story. the taper will be a two-year

story. so while the news will be dominated by syria as long as you have protection in place and you have a reasonable portfolio, you will be fine. if something ugly happens next week, that's probably an opportunity. i would worry much more about the taper. >> the question i am sure a lot of are you asking is how do you do this? brian, we want to go to you, where do you see the spy going and how do you protect that? >> i think when you seen volatility spike like it has, basically, it is telling the options is more expensive than a month ago. the near dated options are more expensive. what i'd like to do is look at my portfolio and treat it like i'm buying insurance on a house or my car. i want a little protection. i don't want to outlay a whole bunch of cash. you can spend a whole lot of money insureing yourself than the actual correction. i want to look at longer dated options. look at correction on the down side, down roughly 20% or so. >> brian is hooding a spread, a

bear strategy, you boy one point and sell a lower strike to reduce the costs. you want to stock to go to if short put strike. that's where your markets are capped. bryant, walk us through this trade. >> this is a trade that basically gives me protection when all hell breaks loose on the market. i am looking at the june option the june, 2014 option, looking down at the spy 130 strike. if i purchase that option, it's trading for roughly 3.65 here. i go ahead or 2.65, i'm sorry. go ahead and sell thedown 110 put. that's the same month strike put to lower the cost of that one put. net on the trade i basically played $1.65. that's only 1% of the value of the spider right now. now i'm laying out 1% value. i look at my portfolio, i say i got 10 grand invested in the market. i can buy one put spread to invest myself, protect myself to

the down side. i can sleep at night. this gives me a little of protection, because i think the fundamental also are an attack on the market. >> besides volatility has gotten a little higher leak it has, you want to use spreads, that's how you capitalize on the options are higher priced. said, i don't know whether i might look with something with slightly tighter strikes where with are right now. you go this far out of the money, sometimes you see it decline. so sometimes a little bit closer to at the money. but it will appreciate it. if you have a short spike. >> we got a question and this week's extra answers that question. it's very similar, instead of buying a long data put spread, it's buying a long data outright on the spy, j why do we do that? this person wanted to be bullish and bearish, implied vol estimate impacts longer dated options and so if you buy a longer dated option, then you are really also betting on implied volatility. compare those two trades, check

out the web extra. they're similar but different. >> real quick, this trade if you look at over history loses a lot. you will give up 1 or 2%. >> so why do this, brian? >> this is insurance so you can sleep at night. when we get a big volatile move down, you are sitting at home, you are not sitting there with money. >> the life insurance that i buy has been a loser every time i've written that check. doesn't mean it was a bad deal. >> let's wrap this up, a little stocks versus option. the stocks can go up forever, brian's put spread which can be outright, the bear issuesed to project your portfolio risks just $165. now, we have been talking a lot about investor concerns over sirria. one big worry is a syrian engagement could mean higher gas prices. josh lipton has more on this back at headquarters. hi, josh. >> hey, mellissa. that's right. it has been a wild week after rising 4% from monday's open gas came back nearly all of its

gains. the key driver for gas has been oil. syria not an exporter but military action could draw the involvement of syrian alloys. iran and russia and that could put major pressure on supplies. now, the u.s. will try hard to avoid that, but if the situation does get out of hand, gascon seumers everywhere could feel a serious crimp in their budgets. mellissa, back to you. >> thank you very much, josh lipton. let's call carter braxton worth of oppenheimer in world's largest retailer. >> wal-mart is inversely correlated to the price of crude and this chart shows it as well as any other way. this is a two-year chart. this is crude oil, wti versus wal-mart, obviously, as we see this recent sprooik spike in crude to 110 a barrel has had an equally and opposite effect on wal-mart. wal-mart is acting aggressively to that.

the prem shun is if there is more coming, here's the trend, we have just broken trend the presumption is lower prices. take a look at the long-term chart. i would say what we look for here is another 7 or 8% to fall back into the range from which we broke out, a 7, 8% move, a fairly small move, for a low beta stock move, it's a big move. >> carter. thanks for that. mike, what's your take on wal-mart? and would you be bearish because of an expected rise? >> wal-mart, we obviously have concerns about the markets. if i was going to make a bet either way, i'd be inclined to go with carter. this is relatively low volatility. can i go out and buy a november put. i can by a dollar for that option. basically, it's fairly close to where it is right now. it's rale relatively inexpensive. i'm taking advantage this has not spiked a whole lot. i can look to spread it. i'm not risking a great deal. >> would you do that?

>> mike makes a point about chief option. you take a shot. volatility and fear is not that high in wal-mart right now. this is a chance to pick up an option. scott talks about it all you can. >> the thing about this is, you know, we talk about put spreads, buying them all the time. you get the math working for you. implied volatility is low, you don't want to do that. when mike sells the 65 strike, he will collect 30 cents. if he goes more, he will collect 12 cents. i wouldn't do that. there is no reason to sell puts for real edly dollar cheap prices even as part of a spread. >> all right. got a question out there. send us a tweet at cnbc options. tonight, scott has another way to protect your portfolio, you want to check it out. options action cnbc.com. you can find trader blogs and educational material. here's what's coming up next. >> talk about being penny wise, a few weeks back, colin carter

made a bearish bet on j.c. penney, can they squeeze out more profits? . plus, car trouble ahead? ford business has never been better. why is carter worth saying shares are about to do this. he'll reveal when "captions action" returns. [ music playing ] [ 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. ♪

[ 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. . >> a couple weeks back with the super power force made a bearish bet on j.c. penney, it was so

successful it inspired vh-1 to make a special about it. take a look. >> reporter: it was the advice mike could never forget, risk less so you can trade more. when it came to trade j.c. penney, it was those words that turned his crunch into a blockbuster. this is a story of a brilliant idea of a painful turn and a mac95 sent resurrection. this is the story behind the trade. this tale starts with carter worth, a childhood friend of mike's. carter wasn't too hot on j.c. penney shares. >> it looks like it's getting much worse. >> reporter: that gave mike the idea to go short. when his friends explained shorting j.c. penney could mean infinite losses he changed his mind. specifically, he sold the september 13th strike calm for $1.35 credit. to keep all that money he needs to see j.c. penney shares to

stay below that $13 strike price. above $13, profits will trail off. mike won't see losses until j.c. penney rises above that call strike price by more than $1.35 he took in or $14.35 by september expiration. but that nagging problem was back. because if shares rise above $14.35, mike would still be on the hook for infinite losses as partner carter worth even threatened to leave the trade. >> i'm pretty sure that's when he hit rock bottom. >> so mike decided to do something about it. he decided to buy a higher strike call, specifically mike bought the september 14th strike call for 95 cents and made the trade into a bear call spread. and that's when he rose from simple trader to global phenomenon. >> no one has done anything like

it. he had the world on the string. >> reporter: between the $1.35 he collected by sell tag lower strike call and the 95 cents he spent on that higher strike calm, mike still pockets 40 cents. itself the most he can make on the trade and in order to keep all of it, mike needs j.c. penney shares to stay below $13.40 through september expiration, above that, mike will see losses, but they're limited to the difference between the strike of the call sold and the strike in the calls he bought minus the credit. >> wow, he was at the top of his game. >> but the deal still wasn't sealed until bill ackman announced he would give up his j.c. penney stake. sent shares lower and guaranteed mike the fame and fortune that he so deeply desired. so what will mike do with his trade now? he may still be able make more but in the meantime, he has single handedly carved out his

place in options trading history. >> before we find out what mike's next move is, we should note that mike's made about half the value of the spread, he can stay below $13, he will capture the full value and keep that credit. we learned that perry capital increased the stake. so the question now, mike, is what will you do? >> i think the real question is, huh is this going to open on tuesday? because the answer to whether or not you close this trade is taking a look at how much that premium represents. you can take this off for less than 20 cents, given all the volatility of j.c. penney. you know, where i saw it close today around 30 cents, i'd probably stay with it. >> we want to go to carter braxton worth. carter got us in. what would you do? >> stay with it. this is as bad as it will be. >> he says stay with it. >> i hate jc penney. i think that company is toast.

there is almost no way you can justify owning the eng this. take a look at the prospects over two years and compare it to macy's, there would be no reason to think they will spin out of this. >> it's a trade to the bitter end. i think a limited order to buy this back makes sense, i think that's the smart trade. >> when you look at this stock, they need to borrow going out three years. you tell me a company that can borrow 12% and make it through it. you'd be crazy. mike set up a great trade. if it gets cheap that spread, you can take it off, you might as well do that. this is a great trade, it's paid off well. >> coming up next, ford shares have been on fire. according to charts and our main man carter, they are about to drive off a cliff. find out why when "options action" comes right back. [ 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. ♪

[ 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.

. >> we have room on the second and third shifts arnold the united states to meet that deman demand. >> despite the warning, there is a change in the charts. carter. >> sure. we'll look at the charts. a lot of consumer discretionary stocks are starting to fall, shoe stocks, general merchandise, they're starting to roll. home builders have started to roll. here's a chart, a for the-year chart of home builders and construction stocks and we have a well defined trend. we have a well-defined break in trend. now, take a look at the next chart, what we have here is all our manufacturers, this is mercedes benz, bmw, ford, peugeot.

as you see here, we have just now started to violate the trend. now the next chart is a bit of a comparison. it is those two over the last year or so. auto manufacturers, big ticket items, versus home builders. our thesis is that autos are going to get worse, in fact, almost as worse as home builders. take a look at this same chart with ford, first the trend, ford is nowhere near it's trend. as a minimum, we think it will go to trend and ultimately break trend. bring it altogether, this would be the comparative chart. which has outperformed all other autos, which have outperformed home builders. they are highly correlated ultimately. we think the whole thing is going like that. >> interesting, you always hear about the pickup truck indicator when it comes to the housing sector. here it looks like the housing will follow housing lower. >> i agree with that. for one thing, expensive items

like this will be interest rate d. as interest rates are rising, it will hurt housing stocks and autos as well. it increases how much they will cost. what alan mulally was talking about, this is an off statistic for three years. it actually has worked out fine for the autos. at this point now ford is trading above its historical valuation. you look at pes. the stock looks cheap. autos should trade cheap like airlines and stocks that have a lot more risk. if you look at it on everything except price to book, it is probably trading to 20% premium over the last couple years. finally, look, if gas prices rise, it's a risk to these two. the highest margin products that these guys sell are suvs and trucks. great small cars, but they don't make as much money on them. so even if they do go in. if they boy those types of things, i will do the taim same

type of trade the fact that premium has not gone up that much. i will buy a put option. i am going out to november to spend 45 cents for the 15-strike put option. if the stock drops, i will look to spread, sell it. take profits and otherwise, of course, it's because it's not here, i have ail time for this playoff. >> mike, you are going real simple these days. >> if you are trading index, where a lot of the premiums have gone up a lot. you have to do something to deal with the fact that premiums have risen a lot. if they haven't, why do trades that are structured as if they have? >> i think when things look as gross as they do that carter laid out, i don't think we need to get that creative, you buy a put, you protect yourself on the downside or use this as a sure best. when you take a look at volatility and every high ford has made has been met with higher volatility. is not good. means people are out there looking to buy protection. they expect some sort of

sell-off here. there is a lot of worries here. >> this is an issue with $16 stocks is that you don't have a lot of spreading opportunities. said, i do not like this i don't like it because the stock has to break even, almost 10%. then it has to drop below that before you make any money, if you will do this tighten up that strike. it doesn't mean you have to do a spread. do something closer to have some money. >> our thanks to carter braxton worth. coming up next the final call from the options pits. [ 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. ♪

[ 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. >> paws up, a searching dog is catching waves and is catching attention in florida. a year later, she's riding waves like an old pro, jumping off the boar. now this four-legged phenom' has served up a rep takes one wave at a time.

spectators flock to the beaches to watch her surf. >> prepare this week's web extra on a spied tore buy and trade, a put spread on spike. >> brian. >> i don't think the markets will be as bad in september as in october. >> mike. >> expensive. you can still use them. >> our time has expired. thanks for watching. have a great weekend. my mission is simple, to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere, and i promise to help you find it. "mad money" starts now. hey, i'm cramer. welcome to mad money. welcome to kramerica. i'm just trying to make you money. my job is to educate you, call me, 1-800-743-cnbc. investing, it isn't easy. but it can be easier and less daunting with a little