things. now you stay safe. bye-bye! this is "options action." tonight, the ballm. steve's stunning announcement sent microsoft shares soaring and options shares 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 google secret buy sign and each time it's flashed shares rally. 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 market side and "new york times" i'm mandy drury sitting in for melissa lee. these are the traders in times square and in austin, texas. hello, boys. great to see you. forget about microsoft for a second because there's another decent tech stock bringing smiles to investors and that is facebook. breaking through $40 on a jpmorgan upgrade. facebook's market cap is just shy of $100 billion. and that is, by the way folks, more than mcdonald's, american express and boeing. the question we have, is it too late to get in? let's get in on the money and find out. brian, i'm going to start with you. everyone pointed to the 38 mark, right, the ipo price as a key barrier. now we've broken through it. we're at $40, do you see more gains from here? >> certainly the move up after

earnings has been enormous. it sort of caught me by surprise a little bit. i had some trades on before the earnings play. made some quick money on that. i kind of got out. i was hoping to see the stock down tick a bit and cover the gap up. but certainly this move has been amazing to the upside. meeting their goals, monetizing ad revenue, now 41% of their revenue. video demand is the next big thing coming from them and where they can charge and get ad revenue out of that. this move is strong. >> those earnings were the key tender e turning point. mike, i want to get to you. the move in facebook comes at an interesting time, right? investors pulled the most amount of money in u.s. stocks in years. do you think facebook and apple might pull those investors back in? >> it's really interesting because we have a tale of two cities in the markets right now. you have a couple leaders that are basically representing the index and how well the market's doing more broadly. facebook is a good example of

that. these are big stocks doing exceptionally well. in facebook's case it's interesting, brian alluded to this, what we're seeing is basically some revenue surprises and earnings surprises naysayers. i will admit i was one of them. i will also tell you i think the valuation is getting questionable. so whether people should be taking their money and plowing it into these stocks at this point is a little more questionable. i think some of the stocks that haven't performed as well and where the fund flows are indicating, those might be a better opportunity than chasing facebook at ten times revenues. >> that's a good point about the valuation. scott, do you agree or disagree? >> i think mike makes a couple of points. i think the reason we see facebook, now it's a business, it's not a fetish, it's not a time waste where people spend time on their computers. they figured out how to monetize mobile. and option traders are hopping onboard. two, almost three calls traded in facebook today for every put. call volume was about three times the average.

we saw call volume in strides above at the money. i think what's going on is it's finally fulfilling its promise as a money making enterprise. >> not just a fad with the cool cats. bottom line here is would you be buying, bryan, as these levels? >> it's hard to buy right here. i think mike talked about getting ahead of yourself. a lot of guys on the trading floor i hear them flying abt. look at a don't cry about it kind of trade dcai, the stock's gotten ahead of you. you may not want to buy it here. i think there are certain ways you can use the options market to play that. going forward whether they miss earnings on their next outlook in october and the quarter after, i want to own the stock and pullback because i think they're doing the right things to project themselves forward, get to the growth numbers everybody was looking for. i want to be just at a lower level. >> explain your playbook. brian is making a bullish bet. usually we buy puts so let's

explain how this 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 stock 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's down there. i do. basically what i'm going to look at is come monday i want to sell a january basically $36 put. that's a strike price at $36. i can collect $2.05. it was trading a little higher on this level earlier in the day. it's a little cheaper than that right now. but basically by collecting $2.05, that's basically 5% of the value of the stock here. now, by selling the put, i'm selling insurance. that means i'm obligated to purchase the stock when it drops below $36. i want to do that. i don't care how earnings look

next quarter. i'll keep cash setd aside to do that if i have to. in the meantime, earn some on my cash and buy in on the dip if i miss the upside, i do, but at least i made 5%. >> absolutely. mike, what do you think of that trade? >> i think one of the advantages here is facebook has no debt. so it's not a levered business, but we see a lot of positive momentum in the stock and impli impli implied volatility. although i'm not so crazy about the valuation for those that are inclined to get on the bull trade on facebook, i think this is a good way to do it. >> let's wrap this up with stocks versus options. want to buy facebook? that will set you back $40 a share. worse case scenario in brian's trade, he could be forced to buy facebook for just under $35. let's move on to the big tech story of the day. it is microsoft massive move higher today after the company

announced that ceo steve ballmer will require within the year. the riel action came in the options market. we have the story in the options action debut. don't mess it up, dominic. over to you. >> i'm not going to, mandy. thanks so much. the headline is clear, options traders see more big gains for microsoft and 640,000 call options traded today. that's six times the normal volume for call options. now, most of the action's centered around the 35 strike calls. but one trade in particular had the options world buzzing. one trader bought 20,000 of the january $45 strike call option for about 75 cents each. now, what does that mean? it means that person sees microsoft trading above that $45.75 mark by january 2015 expiration. so base cl that trader sees microsoft rising 32% by the end of next year. now, if that were to happen, it would be the highest microsoft

stock has traded since the year 2000. so some big bets that mr. softy could make a big move higher. watch those options trades, man mandy, back to you. >> great job, dom, you're a keeper. let's go to carter call to the charts, do you see on today's park? >> not particularly. i want to zero in on one chart. this is the basic one-year chart of microsoft. what i want to zero in on is the plunge of july and the symmetrical recovery of today. now, you can draw the trend line this way or use the smoothing mechanism you'll see on the next chart, but it's all the same principle, which the following. when a stock has a violent reset, and that day happened to be earnings. there's always news that causes a gap. on 250 million shares. and today an equally symmetrical reset on about 200 plus million shares. news-related drop in gap,

news-related heavy upthrust in gap. but the low of the day of the gap is $35.22. do 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. and this is the first chance they've got to be made whole. so we think this is a dead animal here. it's likely to spend a lot of time, here's the long-term chart. this high of '07. we know the stock market exceeded '07 high by a good measure. microsoft still below that '07 high by about $3. we think the best you can get out of this longer term is up there around the $38 to $39 level. look at this experience over the last 10, 12 years, not a happy one. >> absolutely. carter, thank you very much. mike, what's your take on what carter was saying about the stock technically and what's your trade on microsoft?

>> i'm kind of inclined to agree with him. really the issue is pc demand. it's weak. you see that in all of the related stocks including names like intel. they're obviously changing the ceo is the hope that's going to change. but it's not an easy thing to change. and of course they also might be losing basically their own space as well as people migrate to other operating systems. i'm not enthusiastic. it deserves the cheap multiple but never short a stock like this. i'm looking to sell a call spread, take in a little premium, bet that the stock is probably going to hang around this level. the october $35 spread is the one i'm looking to sell. collect the 45 cents, sell around a buck with the 36s against it. if it stays here, i'm going to collect that money. i'm only risking 60 cents to the upside. that's if i carry it to expiration, which i probably wouldn't if the stock broke out. >> scott, does that make sense to you?

>> it does. the risk/regard makes sense. only two things changed in the last 24 hours chlts one, ceo is gone. two, the company is now worth $16 billion more and option traders say it's now 5% less risky. some of the things that haven't changed. mike talked about declining pc demand. it also has not changed that microsoft has missed on tablets and mobile. i want to bet against this. i like the fact mike is putting on a bearish trade after the stock has flight. >> 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. i think it's a great play right there because to carter's point, you know, it looks a little top heavy. the stock probably going to trend around and finagle around. can they move forward as being big part of the market? >> still a few questions out there. dear viewer, if you have a

question. you can send us a tweet at cnbcoptions. we will answer it. tonight, scott will look at m e macy's. go check it out. this is what's coming up next. >> maybe he shouldn't have sweat the small stuff. brian thought small caps were about to plunge, but they've hardly moved at all. so 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.

♪ [ 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. but traders are starting to see opportunity in the tech giant. brian, what are you looking at with google? >> i think you can make some analogy on what's going on in the fear and option pricing on google. start back with the s&p 500 and the vix just to give you a learning experience on how fear and stock prices work together. basically, what i love to see in the nice bull trending market is declining fear, declining volatility. look at the s&p in this huge bull run. every time we get to new highs we see lower and less fear. vix making a lower low

consecutively again and again. i presume if the market can get back to new highs, we could see the vix trade down to ten. that would be a nice way to show the market is still in tact in a bull market. look at google same sort of thing happens. stocks are a bit different. the google vix, which is calculated by the chicago board options exchange, shows the same similar pattern. after earnings and after the fear and excitement about the earnings movement come out, you see google as it's had nice huge rally making lower lows in the vix. you see fear coming out. that means option traders basically not needing a hedge. they love owning the stock. you don't need to buy the put. and even if a stock has bad earnings, like we saw in google, the stock selling off post-earnings in july, we still saw lower lows in the google vix. that's a nice trending bull market. to me that tells me the stock is very healthy and it's a buy. >> can you tell me exactly what the trade is here though? >> for option traders this is "options action" we like to risk less and get more.

one way to do it here is by buying the october $8.55 call, you can purchase that for about $41 and selling for $21. you break even basically as $8.75, which is right roughly where the stock is trading at. i believe google can make a run and push the $8 5, 900 level. this is a great way basically you're risking $20 to make $20. if the thing falls apart, you're stopped below $8.55. can't lose anymore than the $20 you paid. >> what about you, carter? >> i'm 100% behind that trade. i think 1,000 is definitely within shot and the stock acts well. the recent pullback is orderly, and that's what you want for providing an opportunity to buy. >> okay. carter's 100% behind it. what about you, mike? >> you know, one of the things that brian's trying to do here is get into a position where he's long using options, mitigating that downside risk but not spending a lot in decay. oftentimes if you buy options

you have decay. by setting this up in the money call spread you don't have that dynamic. i also like the trade a lot. >> okay. lots of likes going on for google. >> the thing about this one is if the stock goes sideways, you lose a tiny bit, but not much. you would lose a fair amount of money if this was a completely out of the money call spread. one thing, if carter thinks it's going to $1,000, then this is not the trade because this is only going to make money up to about $900. >> good point. small caps have hung in there of late, but there are warning signs ahead. we're going to 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.

♪ [ 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 is the time when they get called out, when we look back on the less successful trades, shall we call them. obviously winners are great, but it is the losers that can make you better. a couple weeks back brian made a bearish bet on the russell 2000. on "options action" it is no small motto, risk less so we can make more. and that's just what brian tried to do with his bearish bet on

the russell 2000. saw a secret sell sign for small cap stocks. well, it wasn't quite like that. so what exactly was it? well, basically brian noticed that the standard correlation between options on the russell -- had gotten way out of whack. well, if you don't, just picture this. and perhaps this too. but just going short the index, well, that, yeah, well -- so to define his risk he brought the iwm september quarterly 97 strike put for $1.15. to make money he needs the etf to fall below the 97 strike put by that more than 1.15 paid or below $95.85 by the september correlation. >> fascinating. >> but it gets even better. that's because by buying that

put brian's maximum loss is the $1.15 he paid. but if he shorted, the etf that tracked the index, he'd be on the hook for unlimited losses if the index continued to rise. and since the time of the trade the russell etf has 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 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 this trade profitable. in fact, brian needs it to fall just below $96 by the end of september to make money. now, september is a ways away and the market's showing a little weakness right now, brian. what are you doing about this? >> it seems like the market wants to hang in there for at least the next week, so maybe there are other trades to mitigate the risk here.

basically, i still see risk in small caps. they've had a huge performance. you look at valuation wise and compare to large caps the ratio of forward looking p/e small cap to large cap is on the high end. i would be looking to rotate money into something else here. i would probably hold that put. it's really only down about 30 cents based on where it closed today here. i'd probably stick with it, maybe sell another option later dated farther out of the money against it or something if you're worried about the decay. basically, the purpose of buying this option here was to give myself protection against my overall global portfolio. i think the small caps are the first to go if we see this market crack. >> the only protection, carter, do you think brian's making the right move? >> it's a great trade. and the truth is the market is deteriorating quite badly. what i mean by that is the number one thing that's worked is now unchanged on the year. home builders as a group. then it's starting to spill over into the consumer names. you saw the dropping in gapping in major names like target and

dick's and aeropostale. getting smoked. now it's starting to happen in names like paint and mattresses. and next principle is autos and financials. the structure's changed dramatically and i think the trade is just fine. >> what about you, mike? >> you know, there's another very quick point i would make and that is between now and labor day basically the price of those options is not likely to decay as much as you might suspect. there's probably concern something could happen after. i would stick with it for sure. >> a reminder as we head to the break, if you want updates, follow us on twitter at cn cnbcoptions. coming up next, the final call from the options pits. 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 ] [ 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. ♪ awe. 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 released their affection without pausing. the two love dogs say love comes in all shapes and breeds. and that, folks, is tonight's optional viewing. time now for a final call. i don't know whether you guys can really follow that. that's kind of hard, isn't it? the last word from the final option pit starting with you, mike. >> you know, if you didn't already put on the hedge brian recommended on the iwm, i think 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 giving yourself a big margin of error. >> we'll check it out. carter. >> maintain longs in gold and miner. >> brian. >> where fear indicated google a buy, still be concerned about small cap put unless you see ibm

trade above. >> all words of wisdom from our traders. thanks, guys. i'm mandy drury sitting in for melissa lee. for more go to optionsactions.cnbc.com. see you next friday 5:30 eastern. >> male announcer: the following is a paid presentation for 10-minute trainer, brought to you by beachbody. do you want results like this? all you need is 10-minute trainer. pay close attention for this special free offer. supplies are limited, so stay tuned so you don't miss out. >> hi. i'm mark steines, coming to you from hollywood, california. we would all love to lose weight and get in shape, right? but the problem we have is time. look, i had all the excuses in the world -- i was too busy, i was too tired, not enough time -- that is, until i discovered 10-minute trainer. that's right -- 10 minutes.