Options Action Recap

If we sound like a broken record, I apologize in advance, but there is a reason we implore our viewers to spend less when using options, and the reason is quite simple: if you spend less, you lose less, and last week's trades offered a great example of that.

Let's start with Stacey collar on the one stock that refuses to go down: Goldman Sachs . Like any sane person, she was skeptical that Goldman could continue to defy the laws of physics and go higher. So against a theoretical long, Stacey suggested selling the Jan 200-strike call for $6.75, and used that money to finance the purchase of the Jan 160-strike call for $6.70, net-net collecting $0.05 to protect her position. The trade gives her upside to $200.05 (every penny counts when you're spending less to make more) and offers protection below $160.05 (it just sounds better than $160).

Alternative Investing - A CNBC Special Report - See Complete Coverage
Alternative Investing - A CNBC Special Report - See Complete Coverage

Dan offered up a similar trade structure. He suggested what's called a put spread collar. What does that mean? Well, like Stacey, Dan was looking to protect profits on his long position in Apple , another stock that refuses to go down. So he employed a similar strategy. He sold an upside call to finance the purchase of downside protection. Specifically, against a long, he sold the Jan 220-strike call for $3.90 and than used that money to buy Jan 175-strike put for $10.90, net-net paying seven bucks to get protection eight bucks below where the stock is trading. But that was too much money for Dan, so he then sold the Apple Jan 160-put and collected an additional $5.90. When everything was said and done, Dan spent $1.10 for a trade that allows him to basically profit if Apple shares soar to $220 by January, but is protected below $175 to $160 over the same period of time. But because he sold that 160-strike put, he loses protection below that level. You take some, you give some.

In the award winning Put Up or Shut Up, Dan and Mike duked it out over the fate of oil. Mike sold the USO November 32-strike put for $1.50 and the USO November 37-strike call for $1.15, net-net collecting $2.65. In this structure, Mike does best if the USO does nothing, and both options expire worthless. But if the USO trades below or above those strikes, he could end up either long or short oil's ETF. So to protect himself, he bought November 42-strike call for $0.35. Now, he's collecting less ($2.30 to be exact), but he's protected against limitless losses if USO marches north of $37, and can make money on this trade is the USO trades between $39.30 and $29.70 by expiration.

Dan offered a slightly more bearish trade. He bought the USO November 33-strike put for $2.00 and then sold two of the November 30-strike puts for a total of $1.80. Net-net, Dan paid a total of $0.20 for a trade that begins paying off once USO trades south of $32.80. His maximum profit of $2.80 kicks in at $30, and his protection trails off at $27.20. Some similarities here: both trades pay off if crude trades slightly lower, although in Mike's strategy, he would prefer that USO does nothing. And both trades will get you long the USO if the stock trades significantly lower. And the payout are similar too, with Dan hoping to make $2.80 if USO goes lower, and Mike hoping to make $2.30 if the stock does nothing or moves slightly lower.

One trade, two strategies.

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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