things. now you stay safe. this is "options action." tonight, war of worries. syria could send gas prices soaring crimping water everwhere. what would that need for our largest retailer. plus, car trouble? >> we're out again. >> no, not that kind of trouble. we're talking about ford because according to carter werth, shares of the auto giant are about to head into reverse. he'll explain why. and freaking out about the market? relax because scott and brian

have a way to protect your portfolio for just pennies on the dollar. "the action" begins right now. nasdaq markets in new york city's time square, i'm melissa lee. these are the traders on the desk. the market is up on a two month high and between syria, fed tapering and the return of the debt ceiling debate already setting up for a september. let's get to money in the now and find out what brian has to say. brian, what do you see in the out months in not only september but october as well? >> we're definitely seeing a rise in volatility. you saw a chart of the vix. basically what you're seeing is volatility rise. people getting nervous about the situation. we started to trickle in the small caps. we saw volatility rising and fear rising in the small caps. it's starting to spill over to

the small caps. august was a horrible month for the market. the s&p is down almost 3%, the dow is worse. that is going to capitulate some fear. we haven't seen all the fear hit the capitulation. maybe there's more to go in the market. we haven't seen the volatility spike that we normally see in october and november. >> it's interesting, one of the things about the spike report is we're going now into an extended week end be. when you take a look at these numbers actually, what's interesting is the way the calculation is done, this understates how much options have held in there. >> just about to back down a little bit. they're usually down ahead -- >> that's right. we've got a very slow week and going into labor day. you have the labor day weekend. of course, we have a lot of things that are going on. the other thing i would point out is that premiums and single stocks actually have not risen quite as rapidly as they have in the broader index. when index is going up, that's a concern that correlation is

rising. that's the kind of risk. and so -- but it also provides the opportunity. >> but in terms of historically what the stock market has done in reaction to bombings and to military threats, the historical reaction has been to sell the threat and buy the bond. in other words, the markets go up once these strikes actually happen. so how do you sort of reconcile that with what the vix is telling us? >> i think it's important what the vix is telling us above 17. it's important particularly in front of a three-year weekend. i think it's really important that the iwm was up about four times that of the vix. i think that's telling you that the market base that small cap stocks are going to have a tougher time. the answer to your question, what do you do? we say on the show, buy protection when you can, not when you have to. it's not unamerican to buy protection in front of something like this because you're worried about your portfolio. we're talking about this, syria

is going to be a two-week story. the taper is going to be a two-year story. while the news will be dominated by syria, as long as you have protection in place and you have a reasonable portfolio, you're going to be fine. if something ugly happens next week, that's probably an opportunity. i would worry much more about the taper. >> the question i'm sure you're asking, how do you do this? brian, where do you see it going and how do you protect that? >> when you've seen volatility spike like it has it is telling you that the price and the cost of the options were more expensive. the dated options are expensive. they're expecting volatile moves in the market. what i like to do is look at my portfolio and treat it like i'm buying insurance on my house or my car. you want to buy some protection and not spend a lot. i like to look at longer dated

options. look to the long side down 20% side. >> brian is using a put spread. you buy one strike and sell one strike. how do you make money? you want the stock to go in the short put strike. that's where you make the most money. brian, walk us through this trade. >> these are the basic trades. it gives me protection if all hell breaks loose in the market. i'm going all the way to the june '14 options looking down to the spy strike. i purchased that option trading for roughly $3.65 here or $2.65. i'm sorry. sell the june $1.10 put. net net on the trade i paid $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, okay, i have 10 grand invested.

i can buy 1 put spread to protect myself. i can stay long in the market and sleep at night. this gives me a little bit of protection because i think the fundamentals are still in the market. >> implied volatility has gotten higher like it has, you do want to use spreads. that said, i don't know if i might look at something that's slightly higher. when you go this far out of the money, sometimes you might see the market decline. so sometimes a little bit closer to that. >> it will appreciate. >> we have a question in this week's mail that answers that question. it's very similar but instead of dieing buying a long dated put spread it's buying a long dated put on the spy. this person wanted to be bearish to the stock market but bullish to implied volatility. if you buy a longer dated option, then you're really also

betting on implied volatility. compare those two trades. they're similar but different. >> real quick on mike's point here, this trade if you look at it over history loses money a lot. you'll give up 1 or 2%. >> this is insurance so you can sleep at night. when we get a big volatile move down and you're sitting there at home, you're not sitting there with millions of dollars. >> my life insurance that i buy has been a loser every time i've written that check and that shows me that was a bad deal. >> one is short the market. stocks can go up forever. buying put spread can be good. now we've been talking a lot about investor concerns over syria, but one big worry that a syrian engagement could mean higher gas prices. josh lipton has more on this back at headquarters. hi, josh. >> melissa, that's right. it has been a wild week for

gasoline futures after rising 4% from monday's open, gas gave 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 allies, iran and russia. that could put major pressure on supplies. the u.s. will try hard to avoid that. if the situation gets out of hand gas consumers could feel syria's crimp in their budgets. >> thank you very much josh lipton. let's go to carl oppenheimer to see what he's watching. carter. >> walmart is inversely correlated to the price of crude. this chart shows it as well as any other way. this is a two-year chart. this is crude oil, wti versus walmart. obviously as we see here, this recent spike in crude to 110 a barrel has had an equally and

opposite effect on walmart. walmart is reacting quite aggressively to that. if there's more coming, walmart has more down side here. we have broken trend and the presumption of lower prices. take a look at the long-term chart. what we're looking at is another 7, 8% to fall back into the range from which we broke out. 7, 8% move is a fairly small move. for a low bid stock, it's a big move. >> mike, what's your take on walmart and are we getting bearish because of an exepected rise. >> at best, walmart is going to be probably fair market value. if i were to make a bet, i'd go with carter. the options are cheap. i can buy a november 70 put. i can pay $1 for that. it's close to where the money is. it's relatively inexpensive. i'm taking advantage of the fact that this has not spiked a whole

lot. if it goes down, i can take it off at a profit. >> would you do that? >> yeah. mike makes a bet on a cheap option. volatility and fear is not that high in walmart. this is a chance to pick up an option that scott talks about. buy when you can, not twhuf to and this is a great way to do that. >> the great thing about this is you get the math working for you. you don't want to do this. if mike goes out and sells the 65 strike he's going to collect all of 30 cents. if it goes down more it goes to 60 strikes, he'll collect 12 cents. there's no reasonable to sell puts even as part of a spread. >> if you have a question, send us a tweet. if you want to check it out, options action.cnbc.com. here's what's coming up next.

>> talk about being penny wise, a few weeks ago they made a bearish bet and the trade is looking strong. can he squeeze out more profits? >> plus, car trouble ahead? ford's business has never been better? so why is carter saying the shares are about to do this? he'll reveal when "options action" returns. >> announcer: options action is sponsored by sink or swim by t.d. ameritrade. time and sales data.er ] 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. ♪

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welcome back. let's get to the upside call where we take a look back on some of our winners. a couple weeks back the super power force that we call co and carter. they made a bearish bet on jcpenney. it inspired vh1 to make a special about it. take a look at it. >> it was the advice that mike could never forget. risk less so you can make more. when it came time to trade jcpenney, it was those words that turned his hunch into a blockbuster. this is the story of a brilliant idea, a painful turn and a magnificent resurrection. this is the story behind the trade. >> this tale starts with carter werth, a childhood friend of mike's. carter wasn't too hot on jcpenney shares. >> looks like it's getting much worse. >> that gave mike the idea to go short, but when his friends explained that shorting jcpenney

could mean infinite losses, co changed his mind. he'd sell a call. specifically, he sold the september 13th strike call for $1.35 credit. to keep all that money mike needs to see jcpenney shares to stay below that call's $13 strike. above $13 profits will trail off then mike won't see losses until jcpenney rises above that kul strike price by more than $1.35 he took in or above 14 mo$14.35 september expiration. that nagging problem was back. if shares rise above $14.35, mike would still be on the hook for infinite losses. his partner carter werth 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 14 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 said anything like it. he had the world on a string. >> now between the $1.35 he collected by selling that lower strike call and the 95 cents he spent on that fire strike call, mike still pockets 40 cents. that's the most he can make on the trade in order to keep all of it mike needs jcpenney 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 he sold and the strike of the call he bought minus the credit. >> wow. he was at the top of his game. >> but the deal still wasn't sealed until bill akman announced he would give up his

jcpenney stake. that 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 to make more, but in the meantime he has single hand deadly 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, but if j.c.p. can stay below $13 he will capture the full value and keep all of that 40 cent value. we learned that perry capital increased its stake in j.c.p. the question is what will you do? >> the real question is how is this going to open on tuesday. the answer of whether or not to close is the difference in the strikes. if you can take this off for less than probably 20 drents or so given all of the volatility in jcpenney, it's probably a good idea to take the money and

run. where i saw it close, i would stay with it. >> carter, what would you do? >> stay with it. this is as bad a chart as you'll find in the whole market. it looks terminal. >> he says, stay with it. i still hate jcpenney, i this i that company is toast. there is really almost no way you can justify owning the thing. at that i can a look at their pros sfek prospects over the next two year -- >> stick with the trade to the very bitter end. i think your idea to put in a limit order to buy this back, 15 or 20 cents. i think that's the smart trade. >> when you look at the stock, they need to borrow 12%. that's their corporate debt. you tell me a company that can borrow at 12% and can miake it through it, that's crazy. this is a great trade and it's paid off well. coming up next, ford shares have been on fire, but according to the charts and our main main

carter, they are about to drive off a cliff. find out why when ""options action"" comes right back. >> announcer: option acti"optio is sponsored by t.d. ameritrade. . split-second stats. [ indistinct shouting ] comes right back. >> announcer: "options action" is sponsored by t.d. ameritrade. >> announcer: "options action" is sponsored by t.d. ameritrade. >> announcer: "options action" is sponsored by t.d. ameritrade. action" comes right back. >> announcer: "options action" is sponsored by t.d. ameritrade. action" comes right back. >> announcer: "options action" is sponsored by t.d. ameritrade. m from td ameritrade. ♪

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♪ [ 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 think right now the u.s.

can come in around 16 million units. maybe up to 17, but the neatest thing is the pent-up demand. we have room on the second and third shifts around the united states to be able to meet that demand. >> that was alan wielali on "squawk box" saying that the car business is looking good. there is a warning in the charts. let's go back to the charts with carter werth and find out what the warning is. >> sure. a lot of consumer discretionary stocks are starting to faulter, apparel stocks, shoe stalks, home builders have started to roll and we think autos are next. here's a two-year chart of home builders and construction stocks. we have a well-defined trend and a well-defined break in trend. take a look at the next chart. what we have here is all auto manufacturers. this is mercedes-be benz, ford,

peugot. we have started to violate the trend as home builders have done several weeks in a row. 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 its trend. as a minimum we think it's going to go to trend and then ultimately perspectively break trend. put it altogether. this would be the comparative chart. ford which has outperformed all other autos which has outperformed all other autos. we think it's going like that. >> not looking good. interesting, mike. you always hear about the pickup truck indicator when it comes to the housing sector. here it looks like the autos will follow housing lower. >> i agree with that. here's one of the reasons. for one thing, expensive items

like this are going to be interest rate dependent. as interest rates are rising that will hurt housing stocks but it will hurt autos as well. it increases how much that hurts consumers. this is an oft talked about statistic. this is how it works out. it's worked out fine for the autos. ford is trading above its historical valuation on almost every single metric. the pes, stocks look cheap. it should be cheap just like airlines and other things that have a broad risk in the market. it's probably trading at 20% premium to what it has. that's obviously a risk factor. finally, look, if gas prices rise that is a risk to walmart, it will be a risk to these, too. the highest margin project are suvs and trucks. great small cars but they don't make as much money. if they do go in, that's not good for ford. i'm going to do the same kind of

trade i did with walmart. i'm he going to take advantage of the fact that it didn't go up. i'm going to buy a put option. go out to november, spend 45 cents here for the 15 strike put option. if the stock drops, i'm going to look to spread, sell it, take a little bit of profits. otherwise, because it's not so near and dear, i have time. >> mike, you're going real simple. buying a put. >> if you're trading index where a lot of premiums are going up a lot, you should be looking to spread. you have to do something to deal with the fact that premiums have spread. if they haven't, why do that if things haven't been structured. >> if they look as gross as what carter laid out, i don't think you need to get that creative. buy a put. protect yourself on the down side or use this as a short bet. when you look at volatility or fear, every new high ford has made has been met with higher volatility. that is not good. that means people are out there looking to buy protection as soon as the stock makes a new high and they expect some sort

of selloff here. there are a lot of worries and this is a simple way to play the short side. >> you don't have a lot of spreading opportunities. that said, i do not like this. i don't like it because the stock has to drop so much just to get to break even, almost 10%. then it has to drop below that before you make any money. if you're going to do this, tighten up that strike. it doesn't mean you have to do a strike but do something closer to the money. >> our thanks to carter braxton werth of oppenheimer. up next, the final call from the options pits. >> announcer: "options action" is sponsored by think or swim by t.d. ameritrade. 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 surfing dog is catching waves and attention down in florida. scout the retriever started by floating on a raft in her owner's pool and a year later she's riding waves, jumping off the board, jumping head first into the next session. they're serving up a reputation as spectators flock to the

beaches to watch her surf. time for the final call. scott? >> prepare this week's web extra on a spider to brian's trade by a put spread. >> brian? >> i don't think the markets will be as bad in september as august. >> single stock options aren't that expensive. you can still use them. >> our time has expired. thanks for watching. have a great weekend. >> announcer: the following paid program for the shark sonic duo is brought to you by euro-pro. [whirring rapidly...] >> both imitate: zzt zzt zzt... [whirring...] >> zzt zzt zzt... [whirring...] >> i have never seen anything like it! >> oh, my gosh, i love the shark sonic duo! the carpet's like new again! >> my kitchen floors are cleaner than they've ever been. [whirring...] >> it's the best cleaning system i've ever used in my home. zzt zzt zzt... [laughs] >> announcer: bright, beautiful carpets, rugs and floors make your home look amazing. but no matter how much you vacuum or mop, you get