night, and i'll be here waiting for you. you stay safe. bye-bye. this is "options action." tonight, ilovers? >> listen, i enjoyed it. i enjoy the company. >> could tim cook and carl icahn become best friends after all? why carl may get his buy back wish and what that could mean for the stock. and talk about social climbers. >> squeeze me. >> oh, no. >> no, not you ladies. >> we're talking about web 2.0 companies and which $5 stock is set to join the party. >> it's evil, don't touch it.

>> that's what investors said about small caps this week. we'll explain why it's about to get much worse. the action begins right now. live from times square, i'm melissa lee. these are the traders here on the desk. and today, gravity was suspended on wall street. if you were a stock, you were up. the s&p closing the week higher. if you were a bond, you were up too. but gold and oil were also higher, in fact the only thing, the vix tumbling on the week. what was behind the buoyant action? let's find out. typically, gold, bonds and stocks still rally together. so mike, what gives here? >> it's interesting. in the past we have frequently talked about equities and said not too hot. not too cold, just right. i would actually argue that taking a look at the economic data everybody was looking for something they wanted and everybody got a little that they did want, basically. we have some indications basically in the number of new jobs created that suggested things aren't too hot. we saw something in the

unemployment that said it was not too cold. i'm not necessarily a complete buyer of all of that though, because i think you had a sharp sell-off. there's a little bit of covering and then maybe people got out of hand. i look at this and i'm not really as enthusiastic as everybody else. so reality still remains. stocks are not incredibly cheap, economic growth is not particularly buoyant. actually, the fact that the vix dropped as far as i'm concerned is good news because if you share my view, you're going to get better opportunities. >> there you go. after all the hemming and hawing all week long, we had a volatile week. the s&p 500 closed at the exact spot where it did last friday. >> off record highs too. >> that's true. so the draw down from peak at the january 15th to the trough and we almost got there. we have a chart of the vix. look at where the vix got just on monday's sell-off. got back up to the levels where it got them down on the 7.5% sell-off last year.

so you know, we have the data here like mike talked about. the ism data on monday we deserve to be down. today we deserve to be down. we didn't go down. what tell it tell you? positioning. people were positioned short for the number and there you go you have a pop right there. >> where does that leave us right now? we have the jobs report -- we're not in a no-man's-land, but what are the catalysts here and where do you see the stocks going? >> i think that's a phenomenal point. we don't have any obvious catalyst. the thing that gets markets to roll over is when you get hit with something you don't expect. the only way to get hit with something you don't expect is when something comes along that's not on the calendar. so my view is that we don't have a whole lot on the calendar. my view right here, we have had an extended period where we haven't had a material correction in the markets. meaning 10% or more. we go 18 months and we see something like that we're at plus 30 at this point. i still feel like we're overdue for a little bit of that. anybody who's running and saying, okay, it's all clear -- >> i think the technical set-up

is really important here. when you look at the chart of the s&p, we went down to the previous low in october. it was down about 6% from the highs and what are we doing right now? we're testing 1800. and that came pretty quickly. when you look at the chart right there, the 50 day moving average, the yellow line you should see a bunch of resistance. if we open up on monday, we could see some follow through i think that's a good spot if you're looking for protection or looking to make bearish bets to get in there and this could be it. >> if you felt the pain on monday and saw the volatility spiking, now is a great opportunity to actually put on some sort of trade if you have a directional view which you do, mike. >> i think that's exactly right. the whole issue has been very often you rarely get a situation where, you know, everything sets up perfectly if you have a directional bet. obviously if we want to be using options on the long side or looking for an opportunity t premiums or options are cheap, we aren't back to where we were. >> let's look at one last point. janet yellen, she's speaking in front of congress for first time next week.

if she signals she'll stay the course with the taper that could be the thing that disrupts markets next week. we have emerging markets. they bottomed this week and they got going before we started getting going. who knows what's coming out of there. but to me i think it sets up really well. if you get a follow through next week and volatility comes down and you like you said you were sweating on monday and you wish you had foot protection -- >> so what's the trade? >> i want to look out at march 31th and when the spy was 179.50 you can buy a put spread and the one march 31st, 175, 165 put spread cost about $1.50. again, i want to do this when volatility is lower and when stock is higher. i was only risking $1.50 for $10 wide protection. that gives me protection down to

165. that's a really important technical support level. i think that's the sort of protection that will act very well if we're down 5% to 10%. in the next month and a half. >> the math on the spread works out very nicely. usually we're looking for 25%. well less than that. i think this sets up very nicely. the one thing i would say, options really come in a whole lot more, you might be able to buy it and like it. >> that's the great point. if implied volatility goes the way we think it will go, you want to leg it. i want to do this for instructive purposes. when we set up these trades, we are looking at the levels. that's why we have our main man carter and we want to sell options where we think there's support to break even. >> and want to short the spy, that carries unlimited risk. dan's put spread offers a 6-1 pay out in risk. moving on here, call them the social climbers, despite the trouble at twitter, they hit

all-time highs. facebook is three times more valuable nan time warner and yelp hitting higher today. and according to the charts snz there's one laggard that could join the party. let's call to the charts with the original chart master himself. what are you looking at? >> zynga. importantly, of course, we have a lot of movement in the last two or three years. these are all stocks that have ipo'd in late '11, '12 and of course you can see these are incredible results. one after another. zillow, facebook. since their ipo except down here on the bottom. zynga. this is quite atrocious. now, it looks to us as though zynga is about to come to life in a big way. we think that's the opportunity. take a look. here's the one year chart and what's important is how well it has responded to the trend line and this huge bounce off this trend line here with this gap. now, i want to say something. this was 170 million shares that day. average daily volume is down

here at like 20 million. so a massive reset with a gap. it stops right at the pass top so pay attention to the 450 level. look at the next chart. we are literally -- this is one of the most gorgeous, bearish to bullish reversals i think i have ever seen. it's a textbook bottoming out formation and if you look at the authority of this 450 level the presumption is a big move to the upside and the foreshadowing of that is the 170 million share day that got us here. >> hey, carter, do you have a chart of the revenue decline year over year? last year? this is one of the thing, yes, that looks gorgeous, looks washed out. i mean, it was a travesty what happened. but two years ago they had $1.2 billion of revenue. last year they had $840 million. >> we want to get to the fundamentals. it's the most gorgeous, bearish to bullish reverse. make the case, they have a lot of other problems here. >> the interesting thing is i'm not going to make the case because this company hasn't made

any money. you know, it's interesting, there are situations when sometimes you can use options to make directional bets when the fundamentals don't back up the story when you have a fairly interesting technical case. which i think is what carter is presenting. so everything that dan just said was true. this company hasn't made any money and it's interesting to me because it seems like they should. you know, you take a look at it and say, okay, if they could do over $1 billion in revenues but year on year they've proven they can't. so i won't pretend next year is a panacea or magic bullet. for those looking for it on the fundamental side. >> so the sole reason you're getting into the trade which is a bullish trade is because of carter's chart analysis? >> a combination of his chart analysis and something i observed in the options market which i thought was pretty interesting to a specific trade structure. >> so mike is bullish. he is using a call fly so got to open the playbook.

that's a bullish strategy where you buy one call and sell two higher strike calls against it. but to protect yourself you buy one even higher strike call. sounds a little tricky here, but here's the bottom line, you want the stock to go to the two strikes where you're short. that's the target for the stock. so mike, walk us through your trade. >> so the interesting thing here is i was looking at april 4.5, 5, $6 call fly. you'll notice it's only half a dollar. so why is this interesting? i could pay a quarter for that. normally what happens when you buy a call fly you're targeting that short stripe, but in this instance if you pay about 25 cents for this which is where it was trading today the maximum profits are at $5.50. but you still make profits no matter how high it goes. you can actually capture 20 cents if this thing goes to the moon. this is unusual in the stock that has a volatility level this high where you can risk 5% of the current share price to make a bullish bet that's going to allow you to participate and if

it falls back to 3.50 bucks it deserves to go there. technically it may not. you're on going to risk 5% of the stock. >> you know what's funny i don't like this trade at all. i'm going to tell you why. i think at $4.50, they have new management there, this company wants to be bought by microsoft. so to me, i think you give up all that potential asymmetric risk for this thing to double or something like that. you can put that on a ton of options in the fly and could lose money if the stock goes up a dollar, a dollar and a half or something. >> if it doubles you'll make about 80% profit on the 25 cents you put in. if it goes to $5.50 which is a 20% increase from where it is right now you'll crush it. you're going to make a 300% return on that. >> so let me ask you this. you were tot totally down on the trade from the beginning. you respect carter, but you wouldn't put the trade on it yourself. why not? >> no. for the loyal viewers here, they may remember last year, we did a trade in zynga, a bullish trade. we did a risk reversal and which

sold it down side put. you know why? because they have half the market cap in cash. back then they almost had all of it in cash. there's a floor for this stock. i just don't think right now you have to try to thread the needle. >> the beauty of it it was a $3 stock and the thing is up 50% since then. >> nice trade. >> it was a phenomenal trade. but it was a phenomenal trade at 3. i don't like it as much. >> you have a question out there, we'll answer it in the 101 web extra. in addition to that, you'll find educational material and exclusive trades so you want to check it out. here's what's coming up next. we have carter and mike join leo's entourage. because they made a ton betting against the small caps index together. and they've got a way to make even more. plus -- >> make love not war. >> that's what tim cook and carl icahn might do at apple's shareholder's meeting.

we'll tell you how you can profit when "options action" returns. shgreat fame. him ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim 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. ♪ >> "options action" is sponsored by -- to me, you know, the options activity has spoken to the fact that the company is whying back stock because a lot of delta one trading going on. options -- well, between it could speak to the fact that there's some banks out there doing accelerated buy back for the company. >> there's our own dan nathan, predicting that apple is buying back stock. however, it was not enough for carl icahn who took to twitter,

surprise, surprise to say this. google at same multiple is worth $1,245 per share. ridiculous. keep buying, tim. you still have $145 billion cash. well, carl, today might be your lucky day because that's what apple could do. dan and mike to explain why at the plasma. over to you guys. >> well, the activity in the options market was the tell that something was going on. there were large blocks that were trading, it was similar to activity we saw when the company did accelerated buy backs in the past. so what do we got going on here. they introduced the initial buy back of $10 billion worth of shares back in 2012. okay. that was in march. then they added to pressure buy a lot of activists or investors in general, they added last year another $50 billion to that buy back. so what's going on right here? they bought $16 billion worth of shares. just in the last two weeks. that probably brings you between $40 billion of the $60 billion.

maybe even higher. by the time they have the february 28th shareholder meeting this is where mr. icaan who owns $4 billion worth of stock is pushing the company as a proxy in place for that investor to vote on, for them to buy up to or excuse me $50 billion or more worth of shares. what's going on here? you know, they may achieve the same goal. the company does not want investors to vote for mr. icahn's plan. obviously mr. icahn does. but you know what, apple may be full up in the next month or so. they may need to do their own massive buy back again and you know what? both sides may win on this trade. >> yeah. i think this is really interesting. first of all, carl's right. a situation like this is absolutely absurd. carrying that much cash. they obviously have floated a small amount of debt on a relative basis. rates being where they are, they should be expanding it. one of the things that people might look to do, take advantage of the situation and just look to sell some puts on this. because effectively buy backs are the put to you.

when you're selling a put you'll get support from buy back and from the hopes there might be one. so simply what i was looking agent today was telling the puts, you can get $25 for that. so you're capturing 5% of the current stock price. the worst is you're compelled to purchase it and they're buying prices higher than that. i think that's a comfortable place to get in. also, if they're not buying back right now, that's probably one of the reasons why volatility in the stock is going to be suppressed. that's why we'll do this instead of running out and buying -- >> that's an important point that the buy back of this size is -- it means over time the price of options should come down. you want to net short the options. at some point they're attractive, but if you're long stock you can sell calls against your stock and take in some added deal there. >> a great point. one of the things you're looking at, if you don't own the stock that's when you sell the put. if you do own the stock, you can

sell some calls. >> i want to bring carter in in terms of your view on the stock, before apple's earnings you were bullish on the stock and apple tanked on the earnings. >> what's interesting is where it touched on the average, and we think the bounce continues. bounce continues. we like it a lot. >> carter likes apple still. coming up next small caps had the worst three-week stretch since june of 2012. why it could get much worse. what's your favorite sport? >> curling. >> hockey. >> ice skating. >> what about curling? it is mine. >> quit sucking up to the host, it's "options action" on the web. all through the games, watch "options action" on line and on demand. go to options action.cnbc.com. or follow us on twitter. it's the games and

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time for i want more cash. time to look back on the big trades to see if we can make even more money. two weeks ago they went short the small caps and they made big profits and here's house. -- how. on "options action," sometimes trading like stars just isn't enough. sometimes we want more cash. and that's just the case of mike's bearish trade on the market. carter thought the box office success of "wolf of wall street" could be a signaling time for the market. >> this is 1987 peak and the movie wall street with michael douglas came out. boiler room was at the market peak. the rerun if you will or the anniversary of wall street, wall street money knows no sleep, at or near the top in '07. and now here we are the wolf of

wall street, leonardo dicaprio and this is not a bottom. >> not quite, because it gets better. that's because at the iwm does fall, that put will increase faster than the iwm drops. he needs it to fall below $105. $105.60. >> there's it, i'm done. meaning more money in mike's pocket. >> i'm talking about this. >> and since the time of the trade, it's fallen 5%, making this trade a winner. while some on wall street are celebrating his success -- >> the whole firm is going nuts. let me open up the door to my office. [ yelling ]

>> others are left unsatisfied. >> i bumped those numbers up. those are rookie numbers. >> forcing us to ask the street's biggest question. how could mike make more cash? >> now, before we answer that, let's explain why buying that was better than shorting small caps. if you went short the iwm a few weeks ago, you would have made 3%. nothing to complain about. but mike's put can be sold back today for $5.50. 25% return. now, carter got us into the trade. what does he see now for small caps, carter? >> i think there's more damage coming, you have a well defined trend and the high was 117. we broke the well defined trend, and now we have thrown back to 110. the high level sell of 7 or 8%. we think this throw back gives you a chance to reshort the

thing. >> how do you manage a traded? >> i would roll down to the 108. and try to do what we were talking about when we put this trade on initially. look for opportunities to spread. keep an eye on twitter too because we will talk about opportunistic times to do that. >> to carter's point, that trend line they broke, that's a nasty looking chat there, i think you look to short charts like that. >> coming up next, we have the final call from the option pits. >> "options action" is sponsored by -- [ indistinct talking ] [ male announcer ] right there in their trading platform. ♪ [ indistinct talking continues ] [ male announcer ] so the magic shell went back to being a...shell. get live squawks right in your trading platform with think or swim 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. ♪ now, what you're watching now is incredible footage of our very own mike khouw trying out for a brand new olympic sport. freestyle sitting. sad he didn't make it to sochi so you can find him and the rest of the gang breaking it down in exclusive online segments over the next two weeks. find us on twitter where our handle is @cnbc options. mike going for the gold. all right. time now for the final call. carter. >> take advantage of the two or

three bounce in equities to reduce your long exposure. >> i agree. wait for the price of options to come in, look at the spy, look to spread into the trades. >> mike? >> consensus. i agree with these two guys. >> our time has expired. see you on the web. check out our website. "mad money" starts now. >> announcer: the following is a paid advertisement for the hurricane 360 spin mop, brought to you by telebrands. a revolution in floor care has finally arrived. in the next few minutes, you'll be introduced to a floor-cleaning system that's lightweight, leaves your floors gleaming and dry enough to walk on in seconds; picks up giant spills; eliminates the need to sweep, meaning you spend less time mopping. a system that people all over america are loving, a mop that spins away the dirt and comes with its own washer and dryer and is the only mop where your hands never touch the dirty water. it's literally a revolution in floor care. >> it's a great mop all around. it's very, very easy to use.