>> this is "options action." tonight, the ballm. steve's stunning announcement sent microsoft shares soaring. traders went crazy. >> here's johnny! >> you'll never believe how high they think shares can go. >> plus it's the secret every investor wants to know. >> no, not that, it's koogel secret buy sign. each time it's flashed shares have rallied. we'll tell you what it is and how you can profit. and do small caps have big problems? some troubling signs are

emerging. we'll tell you what they are. the action starts right now. live from the nasdaq markets in new york's times square. i'm in for melissa lee. these are the traders here in times square is can in austin, texas. hel hello, boys, great to see you. forget about microsoft for a second. because there's another tech stock bringing smiles to the faces of investors everywhere. that is, yep, facebook. breaking through 40 bucks today a jp morgan upgrade. get this, with today's move, facebook's market cap is just shy of $100 billion. yep, that's with a b. more than mcdonald's, more than american express and even boeing. and the question, is it too late to get in? brian, i'm going to start with you, everyone point to 38 mark, the ipo price as a key barrier, so now we're at 40 bucks and a little bit of change, do you see more gains from here? >> certainly the move up after

earnings has been enormous. caught me by surprise. had some trades on before the earnings play, made some quick money on that. hoping to see the stock down tick so i could get back in. but the move has been amazing to the upside. they're meeting some of their goals, monetizing out of their mobile area, now 41% of their revenue. video demand is the next big thing coming from them, where they can charge and get ad revenue out of that. so the move is strong. >> the earnings were the key turning point. the move at facebook comes at an interesting time. investors pooled the most amount of money out of u.s. stocks in five years. so do you think the rally 92 names like facebook and apple might pull those investors back in? >> it's really interesting because we have a tale of two cities in the markets now. you have a couple leaders that are basically representing the index and how well the market's doing more broadly. facebook is a really good

example of that. these are big stocks that are doing exceptionally well. we're seeing revenue surprises and earnings surprises, and i might have to admit i was a neigh sayer. but i think the valuation is getting questionable. so whether people should be plowing their money in this stock at this point is a little bit more questionable. some of the stocks that haven't performed as well and where the fund flows are indicating, those might might be a better opportunity than chasing facebook at ten times revenue. >> scott, agree or disagree? >> he makes some great points. part of the reason facebook is where it is, it's because now it's a real business. not just a fetish anymore. not just a time waster. people spend time on their computers. they figured out how to monetize mobile, and option traders are hopping on board. almost three calls traded in facebook today for every put. call volume was three times the

average. call volume in strikes above at the money. so i think what's going on, it's finally fulfilling its promise as a money-making enterprise. >> not just a fad with the cool cats. the bottom line, would you be buying at these levels? >> it's hard to buy up here. the valuation, a little bit lofty. a lot of guys on the trading floors, i hear them crying about it. the stock's gotten ahead of you, you may not want to buy it here. i'm looking for a pullback to get in. you can use the options market to play that. going further, whether they missed earnings on the next earnings outlook, come october and the quarter evafter that, i want to own it on a pullback, because they think they're doing the right things to get to the growth numbers everybody was looking for. i want to be in this name but at a lower level. >> brian is making a bullish bet by selling a put. usually we buy puts.

so let's explain how this strategy works. when you sell a put, you want the stock to go up. specifically, you want it to stay above the strike of that put you sold by expiration. that allows you to keep the money you took in. however, because you are short that put, you could be forced to buy the stock at that put strike price. even if the stock falls below that level and that could mean losses. that being said, what's the trade? >> you have to have a conviction to buy the stock when it gets down there and i do. so what i'm basically going to look at is come monday, i want to sell a january basically $36 put. so that's a strike price at the $36. i can collect $2.05. it's cheaper than that right now. basically by collecting that money, that's basically 5% of the value of the stock here. by selling the put, i'm selling insurance. that means i'm obligated to purchase the stock. i want to do that if we get a

pullback. keep cash set aside to do that, in case i have to. in the meantime i collect my earnings, some return on my cash. it's a good way to buy in on the dip. at least i made 5% in five months. >> what do you think of that trade? >> i think one of the advantages is facebook has no debts. but we do see a lot of positive momentum in the stock and implied volatility is still rich enough that you're collecting meaningful premium on the downside puts. i'm not crazy about the valuation for those who are inclined to get on the train of facebook, i think this is a good way to do it. >> let's wrap it up with stocks versus options. want to buy facebook? that will set you back $40 a share. let's move on to the other big tech dollar of the day. in case you missed it, you probably didn't. it's microsoft.

massive move high today after the company announced that steve ballmer will retire within the year. but the real action game in the options market. we have that story in his "options action" debut. >> o >>. >> don't mess it up. >> i'm not going to. >> the headline is clear, more big options for microsoft. six times the normal volume for call action. most of it centered around the 35 strike call but one trade had the options world buzzing. one trader bought 20,000 contracts of the january $45 strike call option for 75 cents each. what does that mean? it means that person sees microsoft trading above that $45.75 mark by january expiration. that trader sees microsoft rising 32% by the end of next year. if that were to happen, it would

be the highest microsoft stock has traded since the year 2000. so some big bets that mr. softie could make a big move higher. back over to you. >> thank you very much. great job. you're a keeper. want to bring in our resident chart master. see more gains for microsoft? >> not particularly. really i want to zero in on one chart. this the is the one-year chart for microsoft. this is the plunge of july and the recovery of today. you can draw the trend line this way or use the moving average. but it's all the same principle, which is the following. when a stock has a violent reset, and that day there happened to be earnings. always news that causes a gap. on 250 million shares, and then today a reset on about 200 plus million shares. news related drop in gap. news related heavy upthrust in

gap. here's what's important, the low of the gap is $35.22. and you know where microsoft stops today on the high? $35.20, within two cents. that's not random. the reason that occurs is because when having lost a lot of money, a stock recovers to the level from which it plunged, people's memory kicks in. all the people who took this bad hit want their money back. so we think it's a dead animal here. here's the long-term chart. we know the stock market exceeded the 2007 high. microsoft is still below it's 2005 high by about three bucks. we think the best you can get around there is up to the 38, 39 level. look at the experience of the last ten, 12 years. not a happy one. >> what's your take on what carter was saying and what's

your trade on microsoft? >> i'm kind of inclined to agree with him. really the issue here is pc demand. it's weak. you see that in all of the related stocks, you see that in intel. changing the ceo is the hope it's going to change, but it's not an easy thing to change. they also might be using their own space as well as people mikerate to other operating systems potentially. i'm not enthusiastic about it. i would never short a stock like this. instead, i'm looking to sell a call spread, take in a little bit of premium, the stock will probably hang around this level. the october 35 call spread is the one i'm looking to sell. sell the 35s around a buck. that's a 40 cent credit to me. if it stays right here, i'm going to collect that money. if it drops down, i'll collect it and i'm only risking 60 cents to the upside. >> does that make sense to you? >> it makes a ton of sense.

he's selling at a much higher level and the risk-reward makes sense. there are only three things that have changed in the last 24 hours. one the ceo is gone. two, the company is now worth $16 billion more and option traders say it's 5% less risky. what hasn't changed, declining pc demand. microsoft has missed on tablets, missed on mobile. so i want to bet against this. i like the fact that mike is putting on a bearish trade after the stock has spiked. >> brian? >> to be honest, i'm long the stock, i like it as a slow money play, collect your nice dividend. mike's trade makes sense if you are long in the stock. i think it's a great play right there. to darter's point, it looks top heavy. the stock probably going to trend around until we find out who the new ceo is. will they need more r & d into going into the company? >> so a few questionings out

there. if you have a question, send us a tweet at cnbc options. we'll answer it in our web extra. tonight we'll look at macy's and you'll find great trader blogs and educational material. this is what's coming up next. ♪ everybody dance now ♪ >> maybe you shouldn't sweat the small stuff. brian thought small caps were about to plunge, but they've hardly moved at all. how can he save his bearish trade? plus, don't bother googling it because we're the only ones who know the secret google buy sign. what is it? we'll reveal when "options action" returns. ♪ [ 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. if you have high cholesterol, here's some information that may be worth looking into. in a clinical trial versus lipitor, crestor got more high-risk patients' bad cholesterol to a goal of under 100. getting to goal is important, especially if you have high cholesterol plus any of these risk factors because you could be at increased risk for plaque buildup in your arteries over time. and that's why when diet and exercise alone aren't enough to lower cholesterol i prescribe crestor. [ female announcer ] crestor is not right for everyone. like people with liver disease or women who are nursing, pregnant or may become pregnant. tell your doctor about other medicines you're taking. call your doctor right away if you have muscle pain or weakness, feel unusually tired, have loss of appetite, upper belly pain, dark urine or yellowing of skin or eyes. these could be signs of rare but serious side effects. is your cholesterol at goal?

ask your doctor about crestor. [ female announcer ] if you can't afford your medication, astrazeneca may be able to help. ♪ [ 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. ♪

>> lost in the tech euphoria that is apple, facebook and microsoft. is the relatively flat performance of google. traders are starting to see opportunity. what are you looking at with google? >> when we look at google, you can make analogy on the fear and option pricing. but start back with the s&p 500 just to give you learning experience on how fear and stock prices work together. what i love to see in the nice bold trending market is declining fear. declining volatility in the options market. look at the s&p in this bull run. a lower low consecutively. if the market gets up to a new high, vix trade down to ten, that would show the market is still intact in a bull market. when you look at google, stocks are a little bit different. the google vix whishows the sam

pattern here. after earnings and fear and excitement about the earnings move comes out, you see google with this nice huge rally making lower lows in the volatility index. fear coming up. option traders not needing the hedge, you don't need to buy the put upon even if a stock as bad earnings, we still saw lower lows in the google vix. that's a nice trending bum market. to me, that tells me the stock is healthy and it's a buy. >> can you tell me what the trade is? >> we like to risk less to make more. so here's the trade. if you don't understand options, you can buy the stock. one way to do it is buy buying the october 855 call, purchase for $41. sell the 895 call. your break even is 875 which is

where the stock is trading at. i believe they can push to the 900 level. does it get to a thousand? i don't know, but basically you're risking $20 to make $20. and if things fall apart, you can't lose any more than the $20 you paid for the trade. >> do you like google as these levels? >> i'm a hundred percent behind that trade. the recent pullback is orderly and that's what you want for providing an opportunity to buy. >> carter 100%. what about you, mike? >> one of the thing's that brian's trying to do here is get into a position where he's long using options, mitigating the down side risk but not spending a lot in decay. by setting this up in the money call spread, you don't have that dynamic, so i also like the trade a lot. >> lots of likes going on here for google. >> the thing about this one, if the stock goes sideways you don't lose that much money, a tiny bit, but not much.

you would lose a fair amount of money if it was a completely out of the money call spread. if carter thinks it's going to a thousand bucks, this is not the trade. this will only make money to about $900. >> small caps have hung in there, but there are warning signs ahead. we'll tell you what they are when we come back. ♪ [ 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.

uting ]

♪ [ 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, everybody. i bet you boys really hate this segment because it's the time when they get called out. we look back on the less successful trades, shall we call them? winners are great, but it's the losers that can make you better. couple weeks back, a bearish bet on the russell 2000. >> on "options action," it is no small motto. risk less, to make more opinion that's what brian tried to do on the small cap index, the russell

2000. brian saw a secret sell sign for small cap stocks. well, it wasn't quite like that, so what exactly was it? basically he noticed the standard correlation for prices per options and the index itself had gotten way out of whack. >> everybody getting this so far? >> well, if you don't, just, well, picture this. ♪ >> and perhaps this too. ♪ but just going short the index, well, that's -- yeah. so he bought the strike for $1.15. to make money he needs it to fall below the 97 strike put by more than the $1.15 he paid more below $95.85 by the september

expiration. by buying that put, his maximum loss is the 1.15 he paid, but if he shorted it, he'd be on the hook for unlimited losses if the index continued to rise. since the time of the trade, it's dropped 2%, but not enough to make this trade a winner as of yet. now everybody's asking the same question. >> doesn't anyone want to accomplish anything, or do we just want to make money? >> well, that and and what will brian do next? ♪ >> okay, okay. in all fairness to brian, he has gotten the direction right. the problem is the iwm hasn't fallen enough to make it profitable. he needs to below just 96 bucks by the end of september to make money. september is a ways away in the market is showing weakness. what are you doing about this? >> it seems like the market will hang in for the next week, so

there are some other trades to mitigate the risk, but i still see risk in small caps. huge performance, you being loo at valuation and compared to large caps, the ratio of four looking pe, small cap to large cap, i'm the high end. i would be looking to rotate money into something else. i would probably hold the put, it's probably only down about 30 cents, probably stick with it, sell another option farth out in the money against it, if you're worried about the decay here. but the purpose of buying this option was to protect against my overall global portfolio. the small caps are the first one to go if the market cracks. i think this option is cheap enough you just hold on to it. >> do you know brian's making the right move? >> it's a great trade. the truth is, the market is the cherry quite badly. what i mean by that, the number one thing that's worked is now unchange on the year. and then it's starting to spill over into the consumer names. you saw the dropping and gapping this week in major names like target and dick's and --

[ all speak at once ] >> now it's starting to happen in consumer names. next is autos and i think the trade is just fine. >> what about you, mike? >> there's another quick point. between now and labor day, basically the price of those options is not likely to decay as much as you suspect. there's probably concern something could happen thereafter. so i would stick with this. >> a reminder as we head to the break, if you want updates on these trades, follow us on twitter @cnbc options. if you are on facebook, stay posted on the trends throughout the week at facebook.com/options action. coming up next, the final call from the options pit. don't go away. [ 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 ] ♪ [ 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. ♪ >> aat.

call it love at first bite. these two dogs aren't shy when it comes to their puppy love. the hounds were reunited after a rough summer apart and unleashed their affection without any pausing. to say that love comes in all shapes and breeds. that is tonight's optional viewing. ♪ time now for the final call. i don't know whether you guys can follow that. that's kind of hard on traders. the last word starting with you, mike. >> you know, if you didn't already put on the hedge that brian had recommended on the iwm, there's still time. i like the trade. >> what about you, scott? >> i like retailers and today's web extra is how to get long for no money, but give yourself a big margin of error. >> check it out. charter? >> gold and gold minors. if you're not long, get long. >> and you brian? >> fear has indicated google is a buy, still be concerned about the small cap stock. hang on to the put unless you

see iwm trade above 104 and a half. >> all words of wisdom from our traders. that looks like our time is expired. for more "options action," go to our website. see you next friday my mission is simple. to make you money. i'm here to level the playing field for all investors. there's always a bull market somewhere. and i promise to try to help you find it. "mad money" starts now. hey, i'm cramer. welcome to "mad money." welcome to cramerica. other people want to make friends, i'm just trying to make you a little money. my job is not just to entertain but to educate and teach you so call me at 1-800-743-cnbc. today i want to talk to you about the big picture about building wealth in general. not just owning individual stocks, not that i mind that because stocks are just one part, absolutely the most