Options Action Monday ReCap

No Monday would be complete without a thorough recap of our traders' picks. Our time slot has changed, but our ability to make smart trades and employ the right options strategies has not, and Friday's show offered several prime examples of that.

Stacey kicked it off with a classic buy-write on Caterpillar . The industrial name has had a pretty hot run as of late, and while Stacey was loath to sell the stock, she did notice that prices for Caterpillar options remain expensive, making a put purchase too pricey. So she sought a more neutral options strategy; she sold the November 50-strike call for $260. That call is now worth about $200, so already she's made money. But had you followed her advice, not only would your option trade be in the black, but if you'd held the stock, that $260 you took in by selling that call option more than cushioned you against the decline in the stock.

In the second trade in our show, our resident tech guru Dan Nathan took a similarly dim view on tech titan Hewlett-Packard , and suggested selling an out-of-the-money call against a long position. But instead of just overwriting, Dan took the cash that he received from selling the call to buy an at-the-money put. Specifically, he sold the August 45-Strike call for $65 to offset the purchase of the August 42.5-Strike put, which also went for $65. The strategy is called a "cashless collar," (because it costs nothing) and is a great way to protect stocks in your portfolio - especially heading into an event like earnings. The trade caps his upside to $45 bucks, but protects him against losses should Hewlett trade below $42.50.

In our Put Up or Shut Up, both Dan and Mike offered bullish strategies on Target . Dan settled for the more conservative, and easier to execute August 42/44 call spread. In his trade, he paid a total of $65 to pocket a potential $135, which he'll make if Target trades above that $44 dollar level by expiration. The most he can lose is that $65 bucks, or the cost of the trade. Mike a had cheaper, though riskier strategy. He recommended selling the August 42/40 put spread, collecting a total of $70. But his trade had another component to it. He took that $70 and used it to buy the August 43-strike call for $50. Mike's trade costs less to execute - in fact, it doesn't cost anything at all as he received a net credit of $20. But the put spread that he sold exposes his total trade to about $180 in losses, significantly more than the $65 bucks Dan risked to make $135. However, while Mike's trade risked more, his call purchase gives him at least in theory, unlimited upside. Of course, a realist would wonder just how much upside his trade offers given the fact that that call expires on Friday.

For more options trades, be sure to tune into "Options Action," during our new time on Friday's at 8:30.

Questions, comments send them to us at: optionsaction@cnbc.com

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Host Bio

  • Melissa Lee

    Melissa Lee is the host of CNBC's “Fast Money” and “Options Action.”

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