things. now you stay safe. bye-bye. ♪ this is "options action." tonight -- >> i love gold! >> well, you might be the only one. that's because investors dumped gold at a furious pace. and according to some traders, it's about to get worse. we'll tell you why. plus which one of these three companies is about to release an earnings bombshell? >> i could tell you but then i'd have to kill you. >> no worries because we're about to tell you. and is netflix about to become a nightmare? the stock's had its worst week in months but is the pain about to get worse? the action starts right now.

live from the nasdaq market site in new york city's times square, i'm melissa lee. these are the traders. it is you, the consumer, we are watching tonight. despite the rally in retail stocks, some troubling signs are emerging from very large retail names. is the d.c. dysfunction pinching americans' pocketbooks? let's get in the money and find on it right now. dan, i know you've been worried about retailers for a while, and now we have same-store sales data from the gap which really makes the picture worse. >> yeah, just this week. and this has been going on a couple months now. one of the interesting things to me, all areas of retail. it's low end to the high end. back in august, we had disappointments from macy's and nordstrom's. and we then on the low end had target and walmart disappointing and then in between, we had panera, some of these restaurants. so it's continued into this week. we saw limited, gap and costco miss their comps. so to me, it shows that there is a strained consumer out there

regardless of whether the s&p is 1.5% back to its all-time highs. it will make a new all-time high at some point in we have a resolution. but underlying the consumer here in the states seemed tapped. >> sentiment is terrible. the latest numbers from october, the weakest in nine months. and this is sort of what we saw the last time we had this debt ceiling issue. >> well, so we have all of the headline news things. that's obviously not going to improve sentiment. one of them would be falling unemployment, rising participation. you know, other signs of real economic strength. so consumers really need to see that. they need to see incomes rising. they need to make sure the government is working. they don't have either, you know, i don't really see any reason why people should expect consumers to be out there spending like crazy. and the only thing they are spending on are those things where they think they're taking advantage of a discount they're getting right now. low interest rates. i run out and i buy a car. these are the reasons why people aren't consuming right now. >> only mike coe. >> that's absolutely right.

the only thing that i think that's doing well is nike. everything else, whether it's nordstrom's which has been wallowing sideways all year or abercrombie & fitch which has been horrible, gap lower. nike is the only one of these names that's doing well and they're doing it because people are buying more expensive shoes. but melissa, the question was be terrified of the shutdown? no. shutdown, we're doing okay. what you should be terrified of is the debt ceiling. and if we reach that, then everything is going to get killed. retailers, utilities, materials names, financials, everything. >> scott, don't think for a second the longer the shutdown goes, the more strapped there is a whole slice of the consumer here in the states. so to me i actually think there's a tremendous potential for disruption on the consumer front in the next few weeks. so we're getting these reports in the next week. we just got some this week that are backward looking. that's in the tank. that's okay. but going forward, what are stocks going to trade off of? if q4 looks murky, that's why i'm a little nervous right now. >> the earnings prospect, one of

the things we haven't talked about is margins. that's one of the things costco did talk about. we have seen earnings growth from a lot of companies, a function of financial engineering and buybacks and basically epic margin growth. we are not going to see that. what can prompel stocks higher s rising margins. >> dan, you're looking at home depot at the cross-section of the housing trade and retail. >> home depot is interesting to me, the thing has been a monster. it's up 23% on the year. it's obviously been a massive beneficiary of this housing trade. to me, we had rates hit 3%. the ten-year last month. this thing is stalled out. it did not make a new high with the s&p. the technicals actually look kind of strained. the momentum is deteriorating. this is not exactly -- if you look at that chart, it's forming a little bit of a triangle. i don't think you should go out and short this stock right here. but we can actually leg into kind of bearish shorts. i want to lay out a trade that gets me long puts but i can

finance it in the meantime and i want to be there for the earnings event that's going to come in december. >> dan is clearly bearish. bearish on home depot and using a put calendar. we've done them before but it's always good to crack open the playbook. you'll sell a near dated putting, use it to buy one of the same strike. it's a bear strategy. it requires a little timing. you want the stock to be above the strike that will put you short by the first expiration. so dan, walk us through the trade. >> i think the stock's going to trade somewhere in the mid-70s range. i want to set up, like i said, to own the puts in december. today when the stock was 76.54, i bought the november, december 75 put calendar. so i sold one of the november 75 puts at $1.10, bought one of the december 75 puts for 2.30. i paid $1.20. that's my max risk. really what i'd like to happen is the stock to be at or a little above $75. and then i own those december

puts for cheaper. and then i have some options there. i can basically spread it. i can turn it into a counter again. what i'm trying to do is help finance owning puts for an event. i do have to thread the needle a little, but i'm not risking it unless it blows to the upside. >> we were talking about the consumer being strapped, the consumer feeling not to optimist optimistic. even if it's temporary and if it's for the next three months, six weeks, doesn't the bearish case go away? >> well, for the short period of time, it could, but actually that helps favor calendar trades such as this. one of the reasons for that is the decay is eventually going to accelerate. essentially that put's going to go to zero. you're still going to get to own longer dated protection, and you're going to take advantage of that dynamic. >> that's the thing. that shorter put is going to go to zero. dan's not the only one. about two points trade for every call in home depot today.

and the five biggest trades, five biggest option trades in home depot today, all puts. >> for the latest news out of d.c., be sure to catch our special report tonight called "the debt threat" tonight 6:00 p.m. eastern. let's move on to the other big story of the day, and that is the terrible plight of gold. back to dominic. >> gold prices took another hit in today's trade, and it continues really its longer-term down trend. those gold futures finished by around 2% today, we'll call it around 1270 in terms of futures. now, remember a year ago prices were hovering around $1800. now, the gold chart looks rather interesting, we'll call it. some technicians or analysts that look for trading patterns in these charts are seeing more down side to come. the price has broken below a key level in something called a head and shoulders pattern. basically all it is is a sell signal for gold. of course, earlier this week goldman sachs's head of commodities research said that when the budget and debt issues in washington get resolved, gold

will be a, quote -- and i quote -- slam-dunk sell. remember, goldman has a price target, melissa, of 1050 in terms of that price. back to you. >> thank you very much, dominic chu. that's 1050 for next year, we should note. mike, what's your trade here? >> i would just say very quickly, i have never been a gold bug. history may not repeat exactly, but it does tend to run. if you go further back back to the last gold bubble we had from '76 to '80, it was up 600, a rise similar to the one that we've experienced up to the highs in 2011. it then fell back about 34% or so, had a little bit of a bounce and then just went straight down. it ended up falling about 70%. so if you think it's fallen a lot and that that's a buying opportunity, you'd better prepare yourself for what can really happen when a commodity turns against you. this thing was supposed to be a safety trade. everybody had an excuse to buy it. those excuses are breaking down one by one. and when the debt crisis essentially is eviscerated and tapering comes into place and interest rates rise, the dollar

will strengthen, you're going to see the final washout. that's what i belief. i'm also inclined to make a bearish bet. i'm also inclined to take advantage of the volatility we're seeing right now in the metal. today's behavior is obviously a big part of that. i'm just going to try to put on a calendar put spread. i'm looking at the november, march, 120 puts. buy those for 6 bucks and then sell the near-dated ones against it for 2.60, a net debit of 3.40. actually the near-dated options are extremely highly priced in gld right now because of what we've been seeing. >> scott. >> gold in general got ahead of itself more than almost anything else because of qe. now, this week's web extra, somebody asked how to be bullish in gold. i don't like that because for all the reasons mike lays out but also lower highs and lower lies. this week's web extra is how do to it. >> you don't endorse it at all. >> what are you going to do? >> there are times when people

want to do things and you can't talk them out of it. what you have to do is say if you're gonna do it, at least do it safely. put on a helmet before you jump off the cliff. >> you're also short. >> i actually shorted it yesterday afternoon. to me if this thing in washington does get cleared up, we go back to this complacent market environment, i think gold gets crushed. when it broke 1300 back in january, it went straight to 1200. i think we'll see this off the technical pattern. >> a little stocks versus options. want to short gold? that would be the equivalent of waging nuclear war against your portfolio. big leverage to the down side. limits at just $340. got a question? send us a tweet. we'll answer it in our web 101 extra tonight. scott has an alternative trade on gld which he doesn't endorse, but he'll lay that out for you. in addition to scott, you'll find great blogs and educational material. you want to take a look. here's what's coming up next.

>> so he didn't net any profits. last month dan made a bearish bet on netflix, but the stock has stayed flat. so why is he doubling down on his bearish bet? plus, it's king kong versus godzilla. that's because it's d.c. dysfunction -- >> this isn't no damn game. >> versus the biggest week for corporate earnings. so who will win? we'll explain when we come right back. [ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim 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. ♪

welcome back to "options action." now, close to 70 companies in the s&p 500 are going to report their earnings next week. so we're getting into the heart of earnings season. now, there are a couple big names on tap. we're talking big bank earnings season rolling on. citigroup posting results on tuesday. b of a does it on wednesday before the open, and then there's goldman sachs. they report on thursday. yes, before the open. you've also got big tech names on tap. intel, ibm, google, all of these guys are reporting. now, according to s&p capital iqs howard silverblat, third quarter shares are expected to post another record, but sales may not be as robust, and that's the reason there's still cause for concern. back over to you. >> thank you very much, dominic chu. despite upbeat estimates, there's one name that one of our traders feels could pose sickly earnings, trying his hand is our

own dan nathan. you're looking at johnson & johnson. >> without carter here, this plasma was going to get a little lonely. here's the thing. johnson & johnson has been a massive performer, up 27% on the year. it was a massive beneficiary earlier in the year when rates were really low and investors were looking for high yielding stocks. right now it's a 6% dividend yield. it's expected to grow probably high single didn'ts and it's trading at kind of an expensive multiple. my issue here is we look at their q3 earnings next week. it isn't that they're going to miss so dramatically. it more has to do with the fact that expectations are high. the stock's acted very well. and i think the technicals set up really weak in this one. and so the implied move in the options market for the earnings is at 1.5%, the thing only moves at 1.25%. i'm going to take advantage of the elevated and implied volatility for the earnings week in october in my trade. first i want to look at this trade and i want to tell you what i'm looking at. back on september 20th, i bought some october puts. and i was looking at this

exactly this. okay? this is the chart on september 20th. this is a head and shoulders formation. this is the neckline right here. that's the left shoulder. that's the head. and that was the right shoulder. okay? and i bought the october 90 puts. and you know what the stock did? if i go like this, here's the chart today here, okay? here's the same pattern right here. there is that shoulder. there was that head. here's that other shoulder. it went right down to the neckline almost at 85 bucks. and that was really interesting to me. so what happened in the last couple days with washington issues kind of abating a little bit, the stock rallied 4% in a straight line. so what i want to do right now here is i want to take advantage of this trend line. the stock has continually, since making all-time highs in the summer, it has made lower highs here. and i think we have an opportunity actually to kind of get this thing back to that $85 neckline. and so i don't exactly want to go out again and buy outright puts here. i think the market could have a little room to run to the upside if we get inthings cooling downn washington.

i want to use that high implied volatility in the earnings expiration next week to do it. >> dan, walk us through the trade at this point. >> yeah. here's the -- it's going to be a calendar here, people. we've been talking about them all show. what this is really going to do -- and when the stock today was about 87 -- well, no, excuse me, it was 89.25, i bought the october/november 87.5 put calendar. so i sold one of the october 87.5 puts at 40 cents. and i bought one of the novembers for 87 1/2 puts. it cost me 70 cents. that's my maximum risk. i want to get by the earnings week and then i think the stock has the opportunity to go back to that $85 level that it almost got to in the last couple weeks. >> mike, you follow johnson & johnson. what about the fundamentals side of the story? >> fundamentally johnson & johnson, it's a tried-and-true bond proxy here. this is a stock that does not have very substantial tom-line growth. it trades at a premium to the

market. it's two or three turns richer than the s&p here. and like a lot of stocks that have basically substituted as an income source for people that can't get anything in the fixed-income markets, this is one of the ones that's going to become vulnerable to rising rates. you can see that it actually has had quite a rally. it came off somewhat, but it's still a little bit elevated. i'm not really interested in owning it here. >> scott? >> i think this is interesting because johnson & johnson really low implied volatility. you don't want to clown around and be selling outright options. so dan is getting the math working for him. doesn't work out quite as well in really low implied volatility names, but it's working like it does on all calendars and he's not selling outright options any cheap option name. >> dan, carter worth would be proud of you. you did a fine job at that smart board. nice drawing. coming up next, could netflix become a nightmare? the stock took a tumble this week. we'll reveal why the pain could get even worse. back right after this. [ indistinct shouting ]

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12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. welcome back to "options action." time for total recall where we invoke the name of a classic

action film, a complicated derivatives trade that has not worked out. a couple weeks ought dan made a bearish trade on netflix. it's not quite worked but here's why dan hasn't lost that much money. >> reporter: on "options action," it's how we make money like movie stars. risk less so we can make more, and that's just what dan tried to do with his bearish bet on netflix. dan thought netflix shares were going south. >> the stock is going to pull back 10% to 20%. >> reporter: but just shorting this momentum stock -- >> ah! >> reporter: -- you get the picture. so to make a bearish bet, dan instead bought the november 280 strike put for $6.85. now to make money, dan needs netflix shares to fall below 280 by more than the $6.85 he spent or below by november expiration. shelling out $6.85 just to bet against netflix, does that come with a bucket of popcorn?

dan, let's do this for less. >> i sold two of the october 255 puts. >> reporter: now we're talking. so to cut costs, dan sold not one but two of the october 255 strike puts for a total of $4.60. that makes it easier for him to make money, and here's how. between the $6.85 he spent on one put and the $4.60 he collected by selling the other lower strike puts, dan cut the cost of his trade to just $2.25. and now instead of needing netflix to fall below $273.15 to make money, by more than $2.25, or below $277.75 by october expiration. >> oh, yeah, this is it. >> reporter: well, not quite. because there is a tradeoff, and by selling more puts than he bought, dan could be forced to buy netflix at that low put strike price, or in this case for $2.55 even if it falls well below that level. >> it ruined it.

>> reporter: so to protect himself against that nightmare scenario, dan then bought the october 230 strike put for 75 cents and competed his put fly for a total cost of $3. now dan's protected below the 255 level. but because he spent more, he'll need netflix to fall more to make money. specifically dan now needs netflix shares to fall below the $2.85 strike put by more than the $3 he spent on the trade, or below $2.77 by october expiration. and since the time of the trade, netflix has dropped 5%, not quite enough to make this trade a winner. and now movie lovers all across america -- >> quit telling your stupid story about the stupid desert and just die already! die! >> shh! >> reporter: just want to know one more thing. what will dan do now? want to take a look at this because the timing is pretty interesting. the trade was sort of working.

but then the stock rallied. now, expiration is next week. so dan, what are you planning on doing now? >> this was a tough one. on wednesday when the stock was at 270, this was a pretty decent winner. i made a decision to stick with it because at that point i had 7 1/2 trading days left. the stock was trading so weak, it came down so hard, so fast. i'm inclined to stick with it. this was a set it and forget it trade. it posed poorly on a day that the market closed very well. the momentum might have been broken here. i'm going to stick with this one. >> now, you, i think, said before that you thought that if there's a debt ceiling sort of agreement over the weekend, then it would be a sell the news event. you're setting up pretty nicely, then. >> i think so. and i think that the markets are in position for that. if we do open up and then sell the news, they're going to come right back at these stocks that they started coming at earlier in the week. >> i think everybody knows i'm not a big fan of netflix here. i'm inclined to go higher. the options are so expensive, you do need to sell things against it. that's why you would do something like a butterfly or a

calendar put spread or a call spread risk reversal. there's a lot of things you could do, but i like bearish bets on netflix. >> 287 is a 50-day moving average. i think that's going to be the important level. >> of course, a quick programming note here. for the latest news out of washington, catch our special report "the debt threat" right after "options action" at 6:00 p.m. eastern. coming up next, we've got the final call from the options pits. [ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim 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. ♪ time now for "the final call." the last word from the options pits. scott. >> next week's a chance to be greedy with your executions. >> dan. >> i'm not going to be greedy. i just want to leg into these bearish trades in home depot and johnson & johnson. >> mike? >> weren't you wearing a tie earlier? i like calendar puts in gld. >> you always notice the wardrobe. looks like our time has expired. i'm melissa lee. for more, check out our website

at optionsaction.cnbc.com. don't go anywhere. our special coverage of the shutdown called "the debt threat" starts right now. >> 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 frustrated bec