♪ this is options action, tonight, shutdown showdown. >> go ahead. may mike day. >> washington is driving wall street to the brink. so what sectors could feel the brunt of d.c. dysfunction? we'll have a special report. plus, tapped out. >> no money to buy myself the

g.i. joe with the kung fu grip. >> retail stocks have been a wreck, our casual diners next will break it down. talk about bond bliss. >> nothing more practical than that. >> no. not that bond. these bonds. because treasuries have been on a tear. so can the bond breakout continue? the action begins right now. ♪ >> live from the nasdaq markets, new york city's times square i'm melissa lee. these are the traders on the desk and in austin texas, we know about the dow and s & p 500 losing ground. but it's small caps that has this desk worried tonight. savvy options traders suggests trouble could be in store for this. this has been one of the best performing of the four major indices, what does this mean for the market? let's find out. let's start with the desk. dan, when you look at small caps, it's a bet on businesses mostly domestically oriented. >> desk bear. a little skeptical here. fair enough. listen, today, there was a trade we'll go through that caught my

eye. but when you think about it, the russell 2,000, it is primarily a domestically focused small cap index. so to me, you know, this thing has performed well. massively outperformed the s & p, up 28%, the s & p is up about 18%. people are going for it. as we get to q-4. one of the things that worries me you have portfolio managers looking to rotate out of the stuff that performed very, very well. and look at some of the laggards, which could be larger cap issues. there is nothing wrong with that chart up there. it looks great. if you own it, own it. raise your stops. stick with it. the trade in the options market today was interesting. it was bearish, it's playing for a short term move lower. >> i think what's going on, people are worried about a top. they think the market is going to get ugly, mushy to the down side over the next ten days until we get earnings coming in. if earnings come in like nike, everything is great. but, i think we need to get through the debt ceiling before

that. proof of that is the fact that on a day, when the s & p was down six handles, still close to an all time high. people want protection, because protection is still cheap. that makes a ton of sense. >> mike, interesting to see this move in the small caps, maybe not surprising if you look at the moves in the overall markets. when you see some of the more speculative, and i will say that in quotes, names, moving higher, hitting new all time highs, the lierks of a facebook, priceline, yahoo, really people searching for beta out there. >> what's interesting to me, actually, if we go back one year, what we were talking about is the fact the large caps were outperforming small caps. that's where the performance was. and everyone was wondering how healthy the market was, because we weren't seeing participation in smaller names. now we are getting participation in smaller names. i'd be surprised to see a lot of people selling their winners, a lot of times fund managers, they like to basically take credit for the names that really worked out. you could also see tax law selling the ones that haven't done so well. so, i kind of agree with dan's

perspective. the chart doesn't look bad here. but i kind of would be surprised if you see people basically selling off their winners. that said, you indicated he was the desk bear, i haven't expressed a great deal of bullishness myself at this point. >> it's relative. he is here on the desk, you're not. if you were here -- let's talk about your trader. you are -- you are looking for potential rotation. >> what interested me today, when the iwm is 167, somebody bought this trade, it was a put butterfly in october. that expires. when you think about the timing, you guys talked on fast about the government shutdown. we're going to get by that. that's an early next week thing. the market pops a little bit. we had kind of a roughed up week. s & p was down a percent. the russell didn't go down this week. but then really what's looming is that debt ceiling debate. and then treasury secretary lou earlier this week said that's october 17th. that's an october expiration. this trader today, when the stock was 106.70, the iwm bought

a put fly looking at october expiration, looking for about a 6% move lower over that period of time. that's a trade. this is a trading show. okay? the person defines risk. the person defines time and risk. >> let's get to this bearish trade. >> sure. >> dan has a bearish trade, russell 2,000 using a put fly, a little tricky, good to open the playbook. it's a bearish strategy, you buy one put and sell two lower. you buy one even lower put. you want the stock to go to those two strikes that you're short, that's where you make the most money. dan, walk us through the trade. >> the stock was 106.07 today, it traded 15,000 by 30,000 by 15,000 times. it's a big trade for a stock this size. okay? it was in october, the 105, 100, 95 put butterfly. the buyer paid 60 cents for it. bought one of the october puts for 110. sold two october 100 puts at 30

cents each. total of 60 cents. bought an october 95 puts at 10 cents. so that cost him 60 cents,s that his max risk between 104.40 and 95.60 on the down side. you make up to 440. max risk at 60 cents. he loses it below 95 and above 105. what i like about the trade, what it's doing, it's isolating really key technical levels. 100 is a really interesting intermediate support level. 105 was a breakout level here. so that trader wants that stock to go to 100 by october expiration. >> mike, do you like this trade? >> you know, i think it's a good tactical trade if you feel you could have a five or 6% pullback. i'd go a little further out and maybe not limit the potential gains of my hedge quite so much. bear in mind if we fall back as much as this fly is indicating it might, that only takes us back a couple months. i mean, we just had a phenomenal month in september, up 4% or so for the marketplace. you know, seeing a 5% pullback is not a big deal.

i'd probably press a little further out and give myself a little bit more insurance on the down side. that said, i can see why this trade makes a lot of sense, they are risking so little, the gains are so large on a 5 or 6% pullback. it makes sense if you think about it. >> the potential government shutdown, president obama making a statement late this afternoon, diana is in d.c. with the wrapup. >> hi, melissa. the senate voted today to extend government funding through the end of the fiscal year from september 30th through november 15th. but they stripped out a provision added by the republican controlled house to defund obama care. now the house of representatives has to agree to a deal. president obama made a statement about the vote following. >> my message to congress is this. do not shut down the government. do not shut down the economy. pass a budget on time. pay our bills on time. refocus on the every day concerns of the american people.

>> the house takes up the matter tomorrow with one veteran house republican telling cnbc's john harwood we should be able to avoid a government shutdown or have one for only a few hours t. may be in the interest of the markets to root for a shutdown at least for a couple days, the theory is the backlash generated on wall street and elsewhere might push house republicans into not playing brinksmanship on raising the u.s. debt limit. the treasury says we'll hit that debt limit october 17th. that's just a couple weeks away. >> thanks for that. which sectors might be the most vulnerable to d.c. dysfunction? let's call to the charts. a fancy new toy over there. a fancy plasma screen. carter, what are you looking at. >> first let's step back and look at the group defense contractors. and what i have here, the first chart is all industrials, the sector, which we know are outperforming s & p up 26% last year versus s & p up 20.

aerospace and defense up 42%. this spread is quite epic. now, take a look at the long term chart. this is again aerospace versus it's own sector, all s & p industrials. and here we're starting to see almost working on a double, going back to the early '90s, pretty excessive. now, let's pick on northrup. you're in an up trend, you sort of work along, everything is fine. you can do this forever. you know. but the problem here is that northrup has gone bonkers. and this move, from 70 to 100, keep that in mind. and look at the next chart. that's this breakout here. a huge breakout, and it's already happened. meaning this has already met its mark or price objective. and then this problem. the stock is too far above the smoothing mechanism. history shows, when you're this far above your trend, it's not sustainable. final chart, this is what we think is coming.

here's the long term channel. and the presumption is, we're around 95, coming back down here to mid80s. we are a seller of northrup grum ond. >> carter, i have to say, that must be your dream, to be able to draw on the charts. you are grinning like i've not seen you, not even the birth of your last child. you are happy. >> it's a nifty toy. it works like a charm. >> it does. all right. mike, what is your trade here on northrop grumman. >> put spread. basically capturing profits. i'm looking at the january 9585 put spread targeting mid80s level carter was talking about. i'll pay 375 for the 95s, and sell 85s for a dollar. that's $2.57 when looking at it earlier today. just over a quarter of the value of the spread. this won't decay rapid leap. gives us time for this to play out. it's not just this government shutdown stuff that puts pressure on this. we're decreasing military activity abroad.

that historically has been very negative for defense contractors. >> dan, don't mope. i know you want to play with that plasma over there. >> i'll get my shot. >> give us your take on the trade. >> i like these trades. some of these stocks, to me, i think you stick with what is working. i think a trade, if you own it it's an investment. >> also an opportunity to sell a call spread here, if the stock is going to wallow sideways, the way to make money is sell -- these options are not very liqu liquid. you have to watch execution. >> all right. let's wrap this up with stocks versus options, any of the aerospace stocks. unlimited risk. a three to one payout. risk is $275. got a question, send us a tweet as cnbc options, we'll answer it. right after the show on our new web site. profit from the big moves in the bond market in addition to scott, you'll find great trader blogs.

educational material and exclusive trades. check it out. here's what's coming up next. ♪ >> so it wasn't quite a bond home run. >> gone. home run, barry bonds. >> bold bond call was spot on. so how do they plan on making even more money? plus, with the consumer hurting could casual diners see indigestion? >> i can't believe i ate that whole thing. >> that's when options action returns. >> our newsletter delivered to your in-box. packed with exclusive information and analysis. this is the extra edge you need. it's free, when you register, or visit the member center at cnbc.com. ♪ [ 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. building animatronics is all about getting things to work together. the timing, the actions, the reactions. everything has to synch up. my expenses are no different. receiptmatch on the business gold rewards card synchronizes your business expenses. just shoot your business card receipts and they're automatically matched up with the charges

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welcome back to options action. when it comes to the world of retail, this past week was one that many investors, they want to forget. jcpenney, a huge story. getting within striking distance of a record low, the company surprised many, when it said it would sell an additional 84 million shares of stock to raise capital. then of course, there's walmart. it had a rough week. after reports it was cutting orders with suppliers in advance of the holiday season, because of building inventory levels. now, that called into question, how much demand there would be for this coming holiday season, walmart came out and disputed those reports. other retail stocks that took hits include yoga lululemon and ralph lauren, are there tough times ahead for consumers? keep this in mind, consumer discretionary stocks still the best performing sector in the s & p 500, melissa, so far this year. back to you. >> thank you, dominic.

consumer might be tapped out. what does that mean for casual dining stocks, which are also sensitive to consumer spend being, let's go back to the charts with the casual but never flip carter who can't get enough of this fancy plasma. >> let's have more fun. looking at domino's, really, there's nothing wrong with it. in fact you could say how could you argue with a beautiful orderly up trend? the problem is it's complacent. it's up and up and up. just to put this in mind, it is up 80% year to date. that is excessive. yeah? now, take a look at the next chart. it's the same time frame. it incorporates a smoothing mechanism. how many months can you go without touching your trend line? and it's just exactly a year now, that's beyond what's normal. it's fairly excessive. here's the chart since early '04. again, think about how far above trend, the spread is too wide with a smoothing mechanism. how about a comp?

starbucks and domino's are not comparable. and yet, meaning starbucks is a premiere enterprise, a much bigger company. look how much domino's outperforming starbucks. anyway you cut this, it seems excessive. we are sellers of domino's too far too fast. >> couldn't be more clear. if you agree with the master carter -- >> when do i disagree with him? this is a thing, this com traded 24 times, next year's earn examination pekted to grow 14%. this stock is priced for perfection, if you want to make a contraryion play. report earnings on october 15th. last quarter when they reported stock was down 6.5%. one easy trade to do, if you're the contraryion trader, the october 65-60 put spread when the stock was 67.5, cost about 90 cents. that's max risk. 64.10 is break even. down a few percent. you need a 5% move to break even. the options don't set upgraded. there's only $5 strikes here.

i wouldn't be short this stock either. >> mike. >> i tend to agree. it's a tactical trade on something that got stretched. the consumer names definitely look like they're in trouble. >> all right. coming up next, a bold and beautiful bond call, now thaw they have a way to make more money, they will explain right after this. ♪ [ 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.

uting ]

♪ [ 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 for i want more cash, we take a look back on winners and see if there's a way to make more money from the trade. a couple weeks back colin carter made a bold beautiful call on the bond market. take a look. on options action, only one rule, risk less so we make more, that's just what carter did with their bold bond calm. carter thought bonds hit bottom. >> this is one of those you sell

the new. play for a bounce, if you will in tlt or a pullback. >> this guy must be on to something. so mike made a bullish bet on tlt, the etf that tracks bond prices, there was a slight problem. 100 shares cost over 10 grand. >> come on, let's get nuts. >> so to spend less, mike bought, 104 strike call for $2.90. that gives mike the right to buy the stock at that strike price or in this case for $104 before december expiration. but in order to make money, mike needs tlt to rise above that 104 level by more than the cost of that call, or about 106.90 by december expiration. below 106.90, he sees losses by expiration. but it gets even better. that's because if tlt shares rise above that break even, the call will increase in value faster than the stock will gain

value, meaning more money in mike's pocket. >> this is like discovering plutonium by accident. >> it's even better than that, that's because since the time of the trade the tlt has risen 4%, making this trade a winner. now options action fans only have one burning question. how can carter make even more money? before we answer that, let's see just how much money was made. had you bought the tlt at the time of the trade you would look at a return of 2%, mike's tlt call purchase cost 290 at the time of the trade and can be sold at $4, a return of almost 40%. remember, we need more cash here. who doesn't? so carter, back to you. do you see this bond market rallying continue? >> we do. we think the rally is just early goings, we would stay in the trade. >> stay in the trade. mike? >> i think there's a lot of news out here that the bond market has begun to price, a reversion

to higher rates is probably in the offing, the way to play it, take the profits in the 104 call, use the proceeds to buy the 108 call. you'll take in some net money. we'll lock in some profits, but still be able to continue with our bullish bet. >> scott, where do you fall on this? >> i'm a little bit with mike. i would take some of the money and run. if you upon the other side of this trade, you want to be bearish tlt. we tell you how. >> dan? >> to me this is difficult. we have all of this stuff in washington looming, do we see a flight to quality in bonds. i think that's what mike's deal could be. i think you want to lock in some profits. you don't want to let it all run. >> which is exactly what we're doing. >> a reminder, if you want updates on trades, be sure to follow us on twitter at cnbc options. finally, if you're on facebook, stay posted on trades throughout the week at facebook.com/options action. coming up next, the final call from the options. ♪

[ 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 ] ♪ [ 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. ♪

♪ want to play fetch with a fox? who doesn't? all you need to do is show up at this golf course in switzerland, foxy, as he is known, fetches golf balls, he runs out in the open and gets the ball before it stops rolling and scampers away. but foxy doesn't return the balls, he hides them. and regulars at the course say foxy has taken 100 balls, he believes the balls are eggs. the animal had been fed i had humans when it was young and adaptsed to life around people. that's nice viewing. i wish i had the 15 past seconds back. time for final call. >> defense stocks epically cheap before, they aren't now. now would be a good time to put on puts spreads. >> we're doing puts spreads don't get in the habit of doing these because the market, these are tactical trades.

>> if we bounce on a government deal early next week, you fade it, you look at october put flies. >> all right. it looks like our time has expired. i'm melissa lee, thanks for watching. for more options actioning check out our web site. see you next friday at 5:30 p.m. eastern time. have a great weekend. mad money is up next. 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 cramerica. other people want to make friends. i'm just trying to save you a little money. my job is not just to pertain you, but i'm trying to educate and teach so call me at 1-800-743-cnbc. sell first, ask questions later. that pretty much sums up today. dow sank 70 points.