things. now ystay safe. bye-bye. . . this is "options action." tonight, shutdown, showdown. >> go ahead, make my day. >> washington is driving wall street to the brink. so what's going to feel the brunt of d.c. dysfunction? a special report. plus, tapped out. >> my sunday with the kung fu grip. >> with the consumer add of cash, retail stocks have been a wreck. our casual diners will break it down. talk about bond bliss. >> nothing more practical than that. >> no, no the that bond. these bonds.

treasuries have been on a terror. can the bond breakout continue? the action begins right now. live at nasdaq markets in new york city's times square. i'm melissa lee. these are the traders. we know about the dow and s&p losing ground. it is small caps that has the desk worried tonight. 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? >> usually, when you take a look at small caps, you think it is a bet on businesses domestically oriented. >> the desk bear. fair enough. >> you are the desk bear. >> today, there was a trade that we're going to go through that cut my eye. when you think about the ibm, the etf and the russell 2000, it is primarily a domestically focused small cap index. so, to me, this thing has performed really well. it has massively outperformed

the s&p, up 20% versus the s&p, up 18%. this is where people are going for beta. as we get into q-4, one of the thing that worries me is that you may have portfolio managers looking to rotate out of some of the stuff that has performed very, very well. to me, there is nothing wrong with that chart. if you own it, keep owning it. raise your stops and stick with it. the trade in the options market was kind of interesting. it was bearish. it was playing for a short-term move lower. >> people are worried. they think the market is going to get ugly, mushy over the next ten days until earnings come in. if they come in like nik can he, everything is great. we have to get through the debt ceiling. on a day when the s&p was only down about six handles, still close to an all-time high. people want protection, because protection is still pretty cheap. that makes a ton of sense right now. >> it is interesting to see this

move on the small capps. maybe it is not surprising. we do see some of the more speculative in quotes names moving higher and hitting new all-time highs. the likes of a facebook, yahoo! people searching for ba ta. >> you know what's interesting to me, if we go back one year, what we were talking about is the fact that the large caps were outperforming the small caps. everyone was wondering how healthy the market was. we weren't seeing participation in smaller names. now, we are. i would be surprised seeing people selling their winners. fund managers like to take credit fort names that worked out and some tax law selling in the ones that haven't done so well. i kind of agree with dan's perspective that the chart doesn't look very bad. i would be surprised if you see people selling off their winners. that said, you indicated he was a desk bear. i haven't expressed a great deal of bullishness at this point. >> it is relative e is here on

the desk and you were not. if you were here, it would be a high who is most bearish. let's talk about your trade. you are looking for potential rotation out? >> when the iwm is 160, 70 today, somebody bought this trade. it was a put butterfly in october. that expires. when you think about the timing, you just talked about the government shutdown. we are 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. the s&p was down a percent. the russell didn't go down. the debt ceiling debate is looming. treasury secretary lui said that's october 17th. this trader today, when the stock was 106.70, bought a pult by looking at october exploration, looking for a 6% move lower over that period of time, that's a trade. this is a trading show. the person defined their risic. we'll break it down. the person defined their time span and risk.

>> let's get to this bear's trade. the russell 2000. he is putting a put butterfly. it is hebert ish strategy where you buy one put and sell two lower strike puts against it. to protect yourself, you buy one even lower strike put. sounds complicated. you want the stock to go to the two strikes that you are short. that's where you make the most money. dan, walk us through the trade. >> when the stock was 106.70, this traded 15,000 by 30,000 by 15,000 times. it's a very big trade for a stock this size. it was in october. the 105/195 put butterfly. the buyer paid 60 cents. he bought one put 110. and bought one of the october, 95 puts at 10 cents. that cost him 60 krencents. you make up to 440.

his max risk is at 60 cents. what i really like about this trade, it is isolating some key technical levels. 100 is a really interesting intermediate support level. >> do you like this trade, mike? >> it is a good tactical trade if you feel like you could have a 5%, 6% pullback. i would go a little further out and not limit the gains of my potential hedge. if we fall back as much as this fly indicates it might, that only takes us back a month. we had a phenomenal month in september. seeing a 5% pullback, that's not such a big deal. i would probably press further out and give myself a little bit more insurance to the down side. that said, i can see why this trade makes a lot of sense. they are risking so little and the gains could be so large on a 5%, 6% pullback.

it makes a lot of sense the other story of the day, the potential government shutdown. president obama making a statement late this afternoon. diana oleg is in d.c. with the wrap-up. the senate voted to extend government funding through the end of the fiscal year, september 30th, through november 15th. 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 everyday 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 at worst, have one for only a few hours. it may be in the interest of the markets to root for a shutdown,

at least for a couple of days. the theory is there the backlash generated on wall street and elsewhere might push house republicans into not playing brinksmanship into raising the debt limit we will hit on october 17th. which sectors might be the most vulnerable to d.c. dysfunction? let's call to the charts. a fancy new toy. cartter, what are you looking at? >> we're looking to north grummond. first, let's step back and look at the group defense contractors. the first chart is all industrials. the sector we know are outperforming the s&p of 26% versus the s&p of 20. aerospace, northrop grummond, general dynamics, lockheed, up 42%. this spread is quite epic. take a look at the long-term chart. this is aerospace versus its own sector, s&p industrials. here, we are almost working on a

double going back to the early '90s. pretty excessive. let's pick on north rurop as onf the culprits. when you are in an up trend, you can do this forever. the problem here is that northrop has gone bonkers. this move from 70 to 100, keep that in mind. look at the next chart. that's this breakout here. a huge breakout. it has already happened. this has already met its mark or met its price objective. then, there is this price problem. the stock is too far above the smoothing mechanism. history shows when you are this far above your trend, it is not sustainable. final chart, this is what we think is coming. here is the long-term channel. the presumption is, we are around 95 and coming back down here to mid-80s. we are a cellar of northrop grummond.

>> that must be your dream to draw on the charts. you are grinning like i have not seen you, not even the birth of your last child. you are a happy boy. >> it is a toy and it works like a charm. >> what is your trade here on northrop grummond. >> with a put spread, trying to capture profits as quickly as possible. i'm looking at january, 95/85 put spread. i'm going to pay 375 for the 95s and sell the 85s for $1. $2.75. just over a quarter of the value of the spread. this isn't going to decay very rapidly. it gives a little bit of time to play up. it isn't just government shutdown that puts pressure on this. we are decreasing our military abroad. historically, very negative. >> dan, don't look so mopey. you want to play with the plasma over there. >> some of these stocks have

gone parabolic. if you own it, raise your stop. mike's is a trade. if you own it, it's an investment. >> there is also an opportunity to sell a call spread. if the stock is going to wallow sideways, the way to make mon in i is to sell at cost. these are not very liquid. only 1500 trade every day. watch your execution. >> let's wrap this up with stocks versus options. any of the aerospace stocks that matter. shorting anything carries unlimited wris can. mike's put spread offers a pay youl. defines the risk to $275. send us a tweet. we'll answer it. tonight, scott has a way to profit from the big moves in the bond market. you will find some great trader blogs, educational material and exclusive trades. here is what's coming up next. so it wasn't quite a bond's home run carter's bolo bond call

was spot on. how do they plan on making more money? with the consumers hurting, could casual diners soon see indigestion. that's when "options action returns." get more options action. this is the extra edge you need. it's free when you register. visit the member's 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.

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welcome back to "options actions." when it comes to the world of retail, this past week was one many want to forget. jcpenney was a huge story, 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, there is 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. that called into question how much demand there would be from this coming holiday season. walmart came out and disputed those reports. other retail stores that took hits included lululemon and ralph lauren. are there tough times ahead for consumers? consumer discretionary stocks are still the best performing sector in the s&p 500 melissa. so far this year. if retail stocks suggest

that the consumer might be tapped out, what does that mean for casual dining stocks which are sensitive to consumer spending. let's go back to the charts with carter braxton. you can't get enough of this fancy new plasma you got there, carter. >> let's have some more fun. looking at dominos, there is nothing wrong with it. you could say, how could you argue with a beautiful orderly upfriend. it is awfully complacent, up and up and up. it is up 80% year to date. that is excessive. now, take a look at the next chart. it is the same time frame. it incorporates a smoothing mechanism. one of the rules we spent a lot of time. how many months can you go without touching your trend line? it is just exactly a year now. that's beyond what's normal. it's fairly excessive. here is the chart since early '04. again, think about how far above trend. the spread is too wide with the smoothing mechanism. then, just to put it in perspective, how about a comp.

starbucks and dominos are not comparable. yet, starbucks is a premier enterprise and i much bigger cap company. look at how much domino's outperforming starbucks. any way you cut this, it seems excessive wechlt are sellers of domino's. too far, too fast. >> couldn't be more clear there. do you agree with the master charter worth? >> when do i ever disagree with them? this company is trading at 24 times. next year's earnings, expected to grow 14%. this stock is priced for perfection. if you are contrarian, the report earnings on october 15g9. last quarter, the stock was down 6.5%. one easy trade. if you are the contrarian trader, the october, 65/60 put spread, when the stock was $67.5, cost about 90 cents. 64/10 is your break even. you are going to need a 5% move to break even. the options don't set up great. i wouldn't be short this stock

either. >> mike? >> i tend to agree with this. i think it is a tactical trade. the consumer names look like they are in a bit of trouble it was a bold and beautiful bond call. cohen carter, the bond market bottom. they now have a way to make more money 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.

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from td ameritrade. ♪ welcome back to "options action," time for i want more cash. let's take a look back on winners and see if there is a way to make more money from the trade. cohen carter a couple weeks back made a bold and beautiful call

on the bond market. on "options action" there is one rule, risk less to make more. cohen carter made a bold bond call. he thought bonds had hit bottom. >> you buy the old and sell the new. we would play for a balance, if you will in tlt or a pullback in raise. >> mike thought, this guy must be on to something. mike made a bullish bet on tlt, the etf that tracks bond prices. there was a slight problem. 100 shares cost over $10,000. >> are you nuts? come on, let's get nuts. >> so to spend less, mike said, he bought the tlt december 104 strike call for $2.90. that gives mike the right to buy the stock at that strike price or in this case $404 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 above 106.90 by

december expiration. below $106.90 and he sees losses by expiration. it gets better 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 is even better than that. 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 cohen 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 be looking at a return of about 2%. mike's tlt cost purchase cost $2.90 at the time of the trade and can be sold for $4. that's a return for almost 40%. we need more cash. carter, back to you. do you see the bond market

continue? >> we do. we think the rally is going and we would stay in the trade. >> mike coe? >> i think there is a lot of news that the bond market has been to price in. i think the way to play in, take the profits in the 104 call, use the proceeds to buy the 108/111 call spread. we are going to lock in some profits and still be able to continue with the bullish bet. >> where are you calling this? >> i'm a little bit with mike. i would take some of the money and run. if you want to take the other side of the trade, you want to be bearish tlt, we tell you how to do that. >> this is really difficult, because we have all this stuff in washington looming. do we see a flight to quality and bonds. i think you want to lock in some profits. i don't think you want to let it all run. >> this is what we are doing. >> a reminder if you head to break, if you want updates, follow us at twitter. dan posts regular updates. finally, if you are on facebook,

stay posted on our trades from throughout the week at facebook.com/options action. 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. ♪ wanna play fetch with the fox? all you have to do is show up at this golf course in switzerland. foxy runs out in the open and gets the ball before it stops rolling and scampers away. he doesn't return the balls. he hides them. they say he has taken about 100 balls and he knows the balls aren't eggs.

biologists that watch him say the animal had been fed by humans when it was young and that's a nice optional viewing. time for the final call. mike? the defense stocks were epicily cheap before. they aren't now. a good time to put on some put spreads. >> scott? >> don't get in the habit to do these. these are tactical trades. >> dan? >> if we balance on the government deal, i think you faded and you look at october put flies. >> all right. it looks like our time has expired. i'm melissa lee. thanks so much for watching. check out optionsaction.cnbc.com. see you next friday at 5:30 eastern. have a great time "mad money" is up next.

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