first, then money, then things. now, you stay safe. ♪ this is "options action." tonight, why are traders digging prince? >> thank you very much. >> because new internet stocks are partying like it's 1999 and we'll explain why the party is just starting. plus, rising rates have investors freaking out. >> dogs and cats living together. mass hysteria. >> the man who called the bottom in gold says rates have topped out. he'll explain why. and could microsoft be dead money again? with the palm ballmer boost over, will microsoft see another lost decade? the action begins right now.

live from the nasdaq market site in new york city's times square, i'm melissa lee. there is only one thing on investors minds today. and that is the new iphone. will it be a stud or a dud and what will it mean for apple's stock price? it has been a summer love for the tech giant with shares rising from the june low. why are some traders so skittish ahead of this event. dan, option prices suggest a pretty big move. >> next week's options are applying a 4% move in either direction. the stock just had this 30% run up thee well, actually multiyear lows here. a lot of things going on. i don't think a lot of it has to do with fundamentals. what happened is this thing got too cheap and you got activists involved and it's really turned into -- it really is -- >> i'm going to push back a little. there's a buyback going on and anticipation there was going to be a china mobile deal. we did get that report after hours from dow jones. >> that's clearly fundamental. let me make a real strong case

here. apple is losing in china. when they reported in july, their market share year over year in their fiscal q2 -- or q3 was down four percentage points. this is a really critical sort of thing. we break in with that really dramatic music here. >> you add a carrier the size of at&t or verizon in terms of volume of phones. >> certainly the potential of volume, not potential for margin. one of the things that's definitely true is the valuation compared certainly to the broad market. was looking pretty cheap. that creates a bit of a backstop. the share repurchase going on. a lot of big investors deciding. so there's a money flow backstop that's really helped out a little bit. but it's hard for me to get enthusiastic about it at this point because handset makers, these things should not trade at a market multiple because they are here today and they're gone tomorrow. we've seen it again and again. and you may not believe this, but if 20 years from now people think apple will be the company it is today in terms of its

dominance, i just don't believe that. >> well, the china mobile phones are going to be second tier phones. that means they'll be lower margin phones. what does that mean about apple? apple is every other handset maker that's ever existed. maybe they are no longer the bright shining city on the hill. maybe they are just everything else. and i think that what that means is margins are going to go down. they've done some really great things. they've all been financial things. everybody loves to talk about how apple sold bonds at the very high. great. what about a new product, guys? so you say that it's cheap. maybe it's cheap for a reason. >> on the new product front, we got reports this week and the stock rallied for about a half a second that they are testing six-inch tablets. this is something samsung has been doing. they aren't leading the pack anymore. when we see these two new phones with the ios they previewed in june, i think investors will be day pointed. there's 170 million users on china mobile's 3g network that they'll not rush out and buy tens of millions of these right out of the gate.

it's going to take time here. if investors get too excited about the mina mobile opportunity this week, next week, they'll be disappointed. it's going to take time to work itself through. >> you would buy on a pullback or -- >> i think 500 is an interesting level. it's reached from technical resistance. like guy said before, i think that 50-day moving -- the 200-day moving average at 465 is a really important level. i think you'll see tons of support there because of all the buybacks and all these other reasons that you mentioned. to me if you have to go out and you think this stock is a screaming buy right here because of this china mobile opportunity, i have a way that you can do it that i think makes sense with defined risks. that chart is important. we'll run it again. >> dan has a bullish trade for you on apple. he's using a call fly. let's see how this works. it's a bullish strategy where you buy one call and sell two higher strike calls against it. but to protect yourself you then buy one even higher strike call. sounds a little tricky. here's the bottom line.

you want the stock to go to those two strikes that you are short. that is where you make the most money. that's your target for the stock as well. sort of like threading the needle. it's tricky. dan, walk us through this. >> i do want to buy this stock at 465. i think you'll get some appreciation and get this unchanged at some point in the next six months. you have to get in for next week's event, this is one way to do it. also dlerg fact there's fiscal q4 earnings will be in november expiration. i'm going to choose november expiration to look at this. that could be the pivot point. if this company says they have or outline a road to earnings growth which they have not had in a while, that's the thing the next big catalyst. when the stock was 498 today, i priced up the november 500. 550, 600 call butterfly. that cost $10. so what did i do there? i bought one of the november 500 calls for $25. i sold two of the november 550 calls at $9 each. that's $18. and then like melissa said to cover myself on the up side, i bought one of the november 600

calls for $3. that cost me $10. that's my maximum risk. between $510 and $590 i can make $40. my maximum gain is at $550. so it does sound complicated. it's not. >> there's a reason you want to look at the spread trades like this and a name like apple with an upcoming catalyst. dan was talking about the implied move. the reason we know that implied move is we're looking at the price of options. near dated options are quite expensive going into this catalyst. it's no circumstance when the catalyst is going to come and go while you hold your position that you need to look at spread trades like this. that's going to suck a lot of the premium out of those options. >> we talk about butterflies. i like to look at butterflies as buying one call spread and selling another call spread. you are buying a 500, 550 call spread. selling a 550, 560 call spread. it has to go right to that middle strike to make money.

i don't know why you wouldn't sell a put spread. i don't think anybody on the desk thinks anything we talked about will help those who have the $1,000 price target or anybody long at 705 but i'd rather sell put spreads than put on trades you have to thread the needle. >> dan, do you want to respond? >> 532 is the break even on the year. it's a reasonable outlook if they are able on their next earnings report in november expiration and say we're going to start growing earnings again. you'll have this stock back at 550. >> $50 move. we're talking about $40 billion worth of market cap. that's a pretty big needle. want to buy 100 shares of apple, better get an iloan. that will set you back about $50,000. the call fly costs $1,000. offers a 4-1 payout. let's move on to the other big story of the day and the week. that's the outstanding performance of new internet stocks. dominik is live at cnbc headquarters with more. >> let's call them the next

generation of internet stocks. facebook is roaring back, up more than 140% from its post-ipo low. investors are more bullish on the company now that they've shown they can generate sales and profits. linkedin, another stock. this is up 120% in just 2013 alone. it recently announced plans for a secondary stock offering to help finance possible new product developments and international expansion. and then check out shares of online review site yelp. they are soaring. up about 230% so far this year. analysts of deutsche bank and barclays have slapped buy ratings on yelp shares. threes three companies are trading with different valuation profiles. they're all worth billions of dollars. check out how much in profits they are expected to make this year. yelp still forecast to lose money despind its $4 billion valuation. is it too late to get in on any of these names? let's bring in carter worth.

carter worth of oppenheimer. >> hi there. so we'd say, no, not too late. let's look at a few things and try to figure it out. obviously, great performers. what i have here say one-year chart. it shows how correlated and dynamic these big names are. this is linkedin, trulia, facebook. basically unchanged. no results. yet these are exploding up 100% and 200%. in the last six months, linkedin has underperformed the group. and if you see the stats here, it has been the most sort of benign and we think that's an opportunity. we think it's going to catch up to some of the others. looking at the chart of linkedin, what's important is the well defined levels from which it broke out. when you break out from a range, a period of equilibrium gives way to dis-equilibrium. you only gap with news. it obviously has to be good news. then you get a second gap.

often you get a third. that's probably earnings or something like that. another piece of good news. presumptively one more at which time we'd fade the name. play for that third gap for now. >> mike khouw, it's interesting he focuses on linkedin. they have a different business model from these internet stocks. it's more of a subscription base which levels out the revenues you can see down the pike. >> that's definitely true. like many subscription models, once people start paying they tend to automatically you get dinged on your credit card. >> like you. >> like me. i am a paying subscriber to linkedin. i have been for years. it's hard to get in on a valuation basis because these stocks, we just saw dom's table right there. $181 million in profits nearing $30 billion market capitalization. these are very heady multiples. if you want to try to play the momentum here, you only -- the only intelligent way is going to be with options. i wouldn't go out and start risking capital by initiating new longs on the stock at all-time highs. >> this is a pretty

straightforward one. i'm looking at selling the november 250, 240 put spread. i'm going to collect $19. then pay 14.50 for the two 40s. i'm going to take in 4.50. almost 50% of the difference between the spread. the idea is if the stock sits here or goes higher i'm going to collect that premium over time. obviously if it goes down, i have the risk of having that stock put to me at 250 but i'm covered by the lower strike put that i'm long. and it won't actually go to the full $10 a bet spread value if it declines sharply in the near term. this is a way you can take a measured long position and only really risk $5.50. >> if you share that view -- i don't share that view. the way you are doing it is the right way to do it. we've seen this movie before. we know how it ends. >> why don't you like that view? >> it's mental. these stocks are going up parabollic and make no sense. linkedin is different. they just priced 5.5 million shares at $223. i don't like your strikes. if we get hairy in the next month in the market, that stock

is going straight back down there. people just got that free money. they'll pile out of it. >> it's not going to go to the full ten bucks worth of value of that put spread if that happens in the near term. i agree the valuation is not the justification in this case. got a question? send us a tweet. we'll answer it in our 101 web extra right after the show on our website. scott is looking at an under the radar football play that could have your portfolio feeling pretty fool. check it out. here's what's coming up next. don't call these guys soft. last month, khouw and carter saw a window of opportunity and teamed up to make a bearish bet on microsoft. now their trade is in the green. but they have a way to make even more. plus, talk about a bold call. well, not that bold. carter worth does say the rates are going lower. he'll explain why when "options action" returns. [ 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. ♪

[ 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. we think it is right to do the exact opposite of what is being done on the street you. there's very little down side. all sorts of up side. a very bold call from a bold man. that our own carter braxton worth of oppenheimer calling the bottom in gold about three months ago. that call has been golden, to say the very least. nucarter has an even bolder call in the bond market. he says rates are done rising. let's call to the charts and find out why.

carter? >> let's -- we can look at the charts. the principle is this is one of the cases where you buy the rumor, sell the news. a lot of expectation of tapering. yet we think the movement in the bonds is already pricing that in. this is a long-term chart of a 30-year bond yield. the beauty of the lines is i don't draw them. they draw themselves. we've just now reached the top of the channel. almost 4%. 3.9 and change on the ti30-year bond. that's already pricing in what is coming from the federal reserve. let's look at a few other charts just to put this in context. this, of course is price versus yield. this is the tlt, which is a bond proxy, of course. and this is the move in field. they are literally perfectly inverse correlated as all will know. we think this is at an end. now let's take a look at the tlt itself and here is the play. this is a one-year chart. bonds have been selling off and off and off. of course, rates have been going up and up. we've just started to break out above this channel. we think that's the tell that something is occurring here. now look at the long-term chart

of the tlt and what you have here is we've reached something of a trend line. we'd again here play for a bounce, if you will in tlt or a pullback in rates. >> all right. so mike khouw, tlt. share that view with carter? >> i think it's possible. with bond market actually pretapered. we saw significant outflows of big bond funds. look at pimco. $14.5 billion in june. and how much is taper going to take out of the market? not the full $85 billion the fed has been buying on a monthly baseis. maybe $10 billion or $20 billion. if it starts to level off, you essentially could expect to see that the impact that we've seen is all the impact that we're going to get. at least for now. that's not a long-term call. on a short-term basis, i think that does make some potential sense. what i would do is just play for a bounce in bonds. i think there's a simple way to do it. low volatility instruments. i'd go out and buy the december 104 call in tlt. that cost you a little less than

3 bucks. about $2.90. if we get a rally in bonds, you'll participate. you give yourself a little bit of time for this to play out as well. >> i have a question because there's also the tbt, which is the inverse. would you do the same -- the inverse of this strategy on the tbt? >> you could. these guys are right on a near-term basis, they are very oversold. just as bonds kept going up and up and up. they overshot on the up side they could also do so on the down side. the fed -- maybe they buy mbs but stop buying some of the treasuries. the treasury could get really nailed here and i think yields continue to go up. you do have a hint of an unemployment rate below 7% in the next few months, which some people are saying could happen, then -- >> today we didn't see any evidence that could happen. we're not seeing good economic data. the reason that you buy calls. in the long run, rates will go higher. >> i'd stick with tlt. you don't need to overthink this. when it looks horrible, sometimes it's best.

i think carter here is being incredibly courageous because i think this is completely in the face of conventional wisdom. that said, this is pretty expensive. i don't think that the taper is a rumor. it's a fact. and i think it's going to take a lot of air out of the -- >> the viewer at -- >> sometimes when it looks terrible is when you step in and make the most money but, wow! >> coming up next -- >> 1.5%. no one wanted to expect anything but lower rates. now that we've moved up to 4, everyone is talking higher. we think take the road less traveled. what does microsoft have in common with kenneth branaugh? they both could be dead money again. [ 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. ♪

[ 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. welcome back. time for the upside call. a couple weeks back, khouw and carter made a bearish trade on microsoft. here's how they made their money. on options action, it's how we squeeze profits out of walking dead stocks. risk less so we can make more.

and that's just what mike and carter did with their bearish bet on microsoft. carter thought microsoft shares would stay dead money. >> we think this is a dead animal. >> but just shorting the stock could lead to a bad outcome. >> when there is no more room in hell, the dead will walk here. >> actually, we were worried about another bad outcome because shorting microsoft or any stock for that matter, could expose mike to infinite losses. so to make a bearish bet, mike sold the october 35 strike call for $1. now to keep all that money, mike needs microsoft shares to stay below that call's $35 strike price, above $35, profits will trail off. but mike won't see losses until microsoft rises above that call strike price by more than $1 he took in or above $36 by october expiration. >> you are incredible. >> well, hold on because there is a tradeoff.

and above $36, mike is still subject to infinite losses. can't we do better? >> about 60 cents for the 36 is against it. >> excellent. so to limit his risk, mike then bought the october 36 strike call for 60 cents and created his bear call spread. now between the dollar he collected by selling the lower strike call and the 60 cents he spent on that higher strike call, mike still pockets 40 cents. that 40 cents is the most he can make on the trade, but to keep all of it, mike needs microsoft shares to stay below $35 by october expiration. above $35.40, losses do kick in, but they are limited to the difference between the strike of the call that he sold and the strike of the call that he bought. minus that credit. so in other words, while mike might not be able to raise the dead he can now do something even more impressive. make money whether microsoft drops, stays flat or even goes slightly higher.

>> yes, plan nine deals with the resurrection of the dead. long-distance electrodes shot into the pinnium and pituitary glands of the recent dead. >> microsoft shares have slid some 10% since the time of the trade, making this trade a winner. and now "options actions" fans are coming in from far and wide and they all want to know the same thing. what will mike do now? before we answer that, let's take a look at this trade. mike's captured most of the value of the spread but still about five bucks left to make. so, mike, are you going to close out the trade or reshort microsoft at this point? >> i am not crazy about microsoft, but i would certainly be nuts if i kept this trade on with the risk-reward left. only 5 cents left in the spread. could still be worth $1 on miracle news. i'd absolutely close this position but i'd certainly consider spreading out to another short call spread. >> carter, do you think that would be a good move? >> i think it's a good move. stay away from the stock. why bother? yeah. >> stay away.

>> what if mulally becomes the ceo? >> they also have a analyst meeting. >> why risk 95 cents to make 5 cents. coming up next, the final call from the options pits. [ 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. ♪

[ 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. a dog at niagara falls farm gave birth to eight puppies but has nine mouths to feed. the belgian shepherd receiptly adopted a kitten. it saw eight small hungry dogs and a kitten trying to breast feed. dogs and cats living in harmony. and that is "optional viewing." the last word from the options pits. >>. >> if you have to play apple, you do so with a fine risk into

these events. >> if you are short the microsoft call spread, buy it back when things get that cheap, the risk/reward no longer makes sense. >> i'm melissa lee. thanks for watching. for more "options action" check out optionsaction.cnbc.com. we'll see you back here next friday, 5:30 p.m. eastern. >> announcer: the following paid program for the shark sonic duo is brought to you by euro-pro. [whirring rapidly...] >> both imitate: zzt zzt zzt... [whirring...] >> zzt zzt zzt... [whirring...] >> i have never seen anything like it! >> oh, my gosh, i love the shark sonic duo! the carpet's like new again! >> my kitchen floors are cleaner than they've ever been. [whirring...] >> it's the best cleaning system i've ever used in my home. zzt zzt zzt... [laughs] >> announcer: bright, beautiful carpets, rugs and floors make your home look amazing. but no matter how much you vacuum or mop, you get