people first. then money, then things. then money, then things. now you stay safe. this is "options action." tonight -- >> i'm back, baby! i'm back! >> the housing market is having a serious snapback. so is the rally just really getting started? or is it time to take shelter? we'll give you the play. and apple has been on an incredible run. we have a way to make even more money off the tech giant. >> bill ackman doubling down on herbalife? >> i'm going to say anything publicly. >> but we are. we're breaking it down in a special report. "the action" begins right now. i'm melissa lee. these are the traders here and

in austin, texas. a serious terrorist threat in iraq and more concerns in europe. how did stocks respond? by logging the best week in four months and hitting a record high in the process. is this truly a bulletproof rally or is complacency starting to get dangerous? let's get in the money and find out. is the market right to shrug all these things off? >> we had domestic stuff here. this yellen speech in jackson hole today. 490 of the s&p 500 companies have reported earnings in q-2 and they showed 7.5 earnings growth year of year. domestically things feel pretty good. and a fed that may start to get a little more confident in the economic recovery and start to raise rates. that being says the complacency, you said it yourself. the s&p closed up 2% this week. the vic closed below yield. bond rallies cannot rally here. so, it does feel very complacent. especially when you consider the

dakotas was down 11% from the all-time highs a few weeks ago. this week we got a reading of euro pmi purchasing data. weaker than expected. we're starting to see some of the geo political stuff seep into these euro economies. if they can persist -- and you named all of these geopolitical risks out there. they all have an impact at some moint and multinationals will be affected. >> mike, what did you make of the week? >> one of the points i would make, with the geopolitical issue, the thing you need to focus on when worrying about equity prices is whether or not we're going to get involved and in a big way. the middle east we've got a lot going on there, don't we always. it's like a coal fire that never goes out. i'm not sure i'll concern myself that much as far as u.s. equity prices are concerned with that. and the other thing is, with weakness in europe, italy,

spain, looking at possibly negative economic growth there. one of the things that does is that promotes the central banks to continue to try to lubricate those economies and one way or another that money is going to find its way here. maybe that is helping to offset the concerns we saw earlier in the year when people thought that the fed was going to pull back. >> carter, what's your take? a staggering move in the equity ma markets but yields just want to go lower or remain low at this point. >> well, a week -- this is status quo if it continues. there's a lot of rotation at the sector level. and things that were very cyclical industrials outperformed for a long time. industrials also snapped back. the thing that dan speaks of is very important. europe is in trouble, and their rebound this week doesn't improve it, just sets it back to where it could get in trouble again. >> it seems like those sectors, that would be good news for this

market rally. >> or, it's a late stage phenomenon. but the thing that did happen is that financials and consumer discretion which have been laggards for a long time did catch a bid. >> let's talk about the trade today. >> we didn't talk about oil. this is a uso etf. oil was down 3 1/2%. there's reasons that people talk about oversupply and we're talking about weakness in europe and china and economic data. it could be a demand issue, too. but the trade i want to do is a little, it's a little contrarian. the crude has been down 11% since the june highs when isis started to make inroads in iraq. now, i want to fade the complacency. i think it's way too complacent. i think things are going to continue to get worse over the next few months. i looked at the uso when it was 34.85 i bought a risk reversal. i really wanted to create a band where i would leverage the up side. but defining my risk to actually

getting along on the down side. i used the january 15 risk reversal. i sold one of the jan 33 puts. i used that to buy the jan 37 call. between this band between 33 and 37 i have no profit or loss. i get long above 3p and long down 5% at 33. i like this band here because really what i'm doing is i'm selling that 33 put at the 5 the-week low. i don't think we'll have this crater blow the lows. if there's any spike in anything going on geopolitically. >> that uso etf is a play. >> and very low beta. the energy stocks bounce much more than crude in the event of some sort of scare. but the process of putting op risk reversal is the way to do it. because you won't get a big move out of crude, not like the energy stocks. >> mike, how do you like the trade? >> well, i like it.

crude is a mean reverting asset. i like that. on the single stock side, if you're looking at land drillers, that's another way to put it and they have a lot of global exposure and people worried about what was going on in the middle east. and that's another way to take a bullish bet on crude. >> i asked you whether this is a u.s. play. because brandt is down for the month. but it reacts more to isis and you mentioned geopolitical events being a driver. >> on this program when the uso was 39 we put on a put spread fading that fear. now the uso is at 35. and it made a good move. i'm using uso as a conduit. like a risk asset that i think if geopolitical tensions continue to rise, i think you're going to get a good move. >> i don't think it's specifically a wti thing. a lot of this is a dollar based thing, too. a huge move in u.s. dollar.

a lot of cross currents, not just the politics. >> and apple, ahead of its iphone 6 it closed at a record high today. the options think it will get even better. two apple calls traded for every put. will the bullish call buyers be proven right? the chart master has made it over to the plasma and we'll break it down. carter? >> i've got several charts of apple. and we'll along at how a bad situation improves. i'm going back in time. if you will, take a look at where apple is. i'm going to switch to red here. here's the all-time high, two years ago in september of 2012. roughly a split adjusted price of a hundred. buying stocks in down trends is bad business. drops some 50% or close to it. now let's go forward. clearly developmental breaking above its downtrend. this is as of about eight months ago.

you can wait, go a little further, and wait for a formation like a cup and handle if you like that kind of thing. but ultimately this kind of setup projects right to the past top so here's the actual fact. and this is where we are now. meaning we've returned to where apple was. in principle, a stock that gets back to a well-defined past top, before being able to break out, exceed that top, it responds to that top. that means that apple is likely to be somewhat fallow here. which is to say if you own it, nothing wrong with it, but it's not going to get the outperformance in principle that you just enjoyed over the last many, many months. so put it all together. we know it broke its downtrend. we know it was a cup and handle. we know it projects the top. it did. and is at that top. in principle, you're likely to be a bit fallow here. hold your positions but do something with options. >> mike?

i take it that you also thing apple will be fallow and so therefore have a trade. >> this was the situation, look. carter and i, we put on a bullish bet on apple a little while ago. but here's an interesting thing about the stock. but it's getting towards the upper end of its valuation range. one of the things that people could say about this company for a long time, was that it was cheap. it was obviously a very big company and successful company, but the stock was cheap. we can't really say that anymore. it's trading at 15 1/2 times. the iphone 6 release coming out. some news about potentially some issues with the screen. we'll see if that affects them. but this has been a good stock to buy the rumor and sell the news. and with that in mind, a lot of people probably hold the stock. they're looking for something to do. they don't necessarily want to sell the stock, though. some cases that might even incur a taxable consequence. one of the things to do, one of the most common option trade there is and one of the most successful overtime. and that's to do a covered call.

if you own the stock, you look a sell call against it. look at the levels that carter gave us. i'm looking at the november 105s trading at $3.90. that has days to go. you're going to be collecting about 3% of the stock price. if you can do that four times a year, that works out to about a cost basis reduction of about 12% reduction to your cost basis. you still have an off side. even if you have the stock called away from you or it runs over 205, the exit price would be 180. so, that's a good way to play apple at these levels. >> if you were with apple, and saw the record highs today, what would you do, dan? >> i'm not a fan of override. i get what they're saying. if you were inclined to say, we're going to have a september 9th event, the launch on september 19th. if you put a limit order for the stock, you might as well go sell a call. because you take premium in and do that.

but to me, the euphoria around the stock right now resembles a lot of 2012 before the iphone 5 lines. i wouldn't be committing however. i don't mind this trade whatsoever. but if you're in the bull camp, i wouldn't sell calls. it will do something more than people are expecting right now, on the wearable front or new services, you could see a 110 stock. but i don't see it right now. >> carter, anything to indicate it will be fal pope any sign it will remain so? >> well, one thing worth noting, this is a two-year time frame that has elapsed. september 12th to september 14th. stocks the same 600 million. s&p up 36% in the period. at this point, apple was 5% of the s&p. now it's only 3.5%. value in principle is built here.

it should ultimately go higher. >> in fiscal 2012 they earned $6.30. they were supposed to do that in fiscal 2014. how much stock they bought between now and -- they bought $53 billion in stock. the earnings number would be lower. so, i think the symmetric chart there looks good. forget taxes. if you think the thing is up, it takes a profit. >> send us a tweet @cnbcoptions. we've got the hottest options news, videos throughout the week and exclusives. you want to check it out. here's what's coming up next. a huge options bet today has the entire market buzzing. who was behind it, and what's the best way to cash in? we've got a special report. and housing stocks are starting to mount a turnaround. >> every dog has his day. >> is a full blown rally ahead? we'll give you the moves, when "options action" returns.

♪ [ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 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.

when the world moves, with the mobile trader app. futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with paper money to test-drive the market. all on thinkorswim from td ameritrade. you really find a lot of riff-raff in times square these days. it was the biggest options trade of the day. a huge bet on herbalife. tell us what this is all about. of course, the number one suspect would be bill ackman. >> exactly. i'll tell you why. this right here, 50 million in premium. this is a 4 1/2 billion market cap company. we know he's a large part of the

short interest which is probably 40%. his case is very well known. he thinks the company is a zero. i'm going to break down the trade, and tell you why doubling down in certain ways at least on his options positions that are in the listed market. let's look at the five-year chart. this is earlier this year, when the stock made an all-time high in the low 80s. right around here there was some curious purchases of january 15, 50 puts. about 45,000 bought for about $7.20. those puts got sold today. 28,000 of them sold for not a huge profit. but this big one, the $50 million. he rolled the view out, pressing his short. like trader lingo here. >> right. >> he bought 32,000 of the january 2016 expiration 50 puts. that's at the money. think about this. you take the strike which is 50 less the 15th. you break even at 35. that's considerably lower here.

think about it, you would only do this if you thought it was going down to low single digits. two to run risk reward. rifging 15 to maybe make 35. that's not fantastic when you think about the fact how many stocks really go to zero. so if it's him and much more convicted view now at 50 than he did at 70 at least on the portion that's in the listed market. >> and mike, what's your take on what a trader should do with this sort of information? >> well, the first thing i would say, is i've never been big fan of herbalife. this last quarter, you're dealing with something that could be a pyramid scheme, what you're waiting for is something that could show cracks. and i think we're starting to get that. whoever traded this, and if it was bill ackman, that's likely. but the important thing is is here is when you're putting it on with bets, this could take a very long time. and that's assuming he's right. but if i was taking a look at the situation, the risk-reward

relationship seems a little expensive for my perspective. i might actually look at potentially selling call spreads to collect some premium to help finance the purchase of those longer dated puts if i was going to be making a bearish bet this way. >> carter, what is your take? >> it's dreadful. that doesn't mean my interpretation. that's as clear as the nose on the face. we can all see something is wrong. the $50 level has been breached, and the presumption is lower prices. >> what would you do, bottom line? >> i think the tough press at $50 a stock is down 5% on the year. but here's the thing. i believe bill ackman is right. he's laying down the gauntlet to herbalife management. he's saying i'm here to stay. they don't know what he's got in the over-the-counter market. and back in february, they issued a $1.1 billion convertible note. they bought back their stock at much higher levels. you know why i think they did it, to squeeze ackman.

then in april they suspended their dividend. you know why? to buy back more stock. they've got nothing left, and he's got the staying power here. i think a lot of investors think it's an asymmetric bet, but he's defined his risk and he continues to do it and pushing the view out. >> would you ride along? >> listen, i had a short defined risk position. i covered it a couple weeks ago. i would wait until the high 50, 60 bucks. that's the level to get back in. coming up, is the housing market back? that's next, when "options action" returns. [bell rings] ♪ time and sales data. split-second stats. ♪ its so close to the options floor,

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it's been a huge week for housing stocks. the home builders etf is up 4% this week. but that's bad news for dan nathan. here's why. it's how we construct winning trades. risk less to make more. that's what dan tried to do with his bearish bet on the home builders etf. he thought they were on shaky ground. >> i think it probably goes a bit lower.

>> just buying short, we're not trying to buy a mansion here. to define his risk he instead bought the 31 strike put for a dollar op to make money he needs it to fall below $31 by more than the cost of that put. or proceed 30 bucks by september expiration. but shelling out a buck just to bet against housing? >> whatever. >> let's do this for less. to cut costs dan then sold the july 31 strike put for 30 cents and created his put calendar. he did something even better. he made money making easier, and here's how. between the dollar he spent on buying the longer dated put and the 30 cents he collected by selling the shorter dated put dan cut the cost of his trade down to just 70 cents. now to make money dan needs shares to fall below the strike price by more than the 70 cents he spent or below 30.30 by september expiration. >> yeah, that's the ticket. ♪ we built this city >> but it gets even better.

that's because the put that dan sold will decrease in value faster than the put that he bought, meaning he could turn time into money. but don't forget there's a tradeoff. and because he sold at near dated put, dan needs shares to stay above $31 through first expiration but fall below that level by the second expiration. since the time of the trade that short dated put has expired, worthless. but he still needs the etf to drop further if he's going to make money. so, now, every "options action" fanatic wants to know what will dan do now? ♪ we're on the road to nowhere . that's a sad face, dan. now what? >> the brilliant thing about tv and the web. this thing worked out fantastically. the stock broke 31. the short-dated put expired worthless. the trade was almost a double. but a huge rally, some good housing data in the last week and a half. it's come back.

i hope if this was the sort of trade you put on, you took the profits when it got down to almost 29. that was the setup. we don't press things when they're collapsing. it went from $33 to $29 in a month. that's a good clue. >> would you be inclined to reshort? >> i'm getting close. right back in the middle of the six-month range here. stopped at its 200 day. sorry, carter, this is your stuff. it looks like an attractive entry again. just that, it's thrown back to a difficult level. broke once recovered to a juncture where in principle you're back to a level where those who were trapped but didn't act are likely to say, wow, i have a gift here. i should come out. it hasn't improved with the move with home depot. that's a tell. home depot was massive this week and didn't help to save this group. >> i liked what dan did the first time. buying longer option with the nearer dated ones especially in environment wrs the market isn't

really moving around that much at the moment. that's kind of what we have right now is a really good way to play. the only thing i may do a little bit differently, just roll out as far as i could on the long-dated one. i might go out four, five or even six months or more and then those nearer dated options and keep doing that again and again and wait for the market to crack. coming up next, the final call from the options pits. time for the final call. the last word from the options pits. ♪ [ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 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.

when the world moves, with the mobile trader app. futures move first. learn futures from experienced pros with dedicated chats and daily live webinars. and trade with paper money to test-drive the market. all on thinkorswim from td ameritrade. >> the simplest trades, are always the best ones. i would consider overwriting my apple position. >> ditto for me. retain apple but take action in the options market. >> and i think the market is way too good of a place given the geopolitical backdrop. >> looks like our time has expired. check out the website optionsaction.cnbc.com.

see you back here next friday 5:30 p.m. eastern time. "mad money" with jim cramer starts right now >> announcer: the following is a paid presentation for the wolfgang puck pressure oven brought to you by kitchentek, bringing life-enhancing technology to your kitchen. wolfgang puck is heralded as the authority on fine cuisine. from his flagship restaurant in beverly hills to his worldwide culinary empire, he is dedicated to elevating fine dining for everyone. and now wolfgang is proud to unveil his breakthrough innovation. introducing the revolutionary wolfgang puck pressure oven. designed to transform meal time from ordinary to extraordinary and in a fraction of the time of