is this -- people first, then money, then things. now, you stay safe. bye-bye! this is options action. tonight -- after apple's beats by dre deal, what's the next big take yore? the shocking name options traders are betting on. plus -- >> it's the world pulled over your eyes to behind you from the truth. >> the truth is only a handful of stocks are holding up the market. which ones and which that could spell trouble. and -- >> man, now i know we're in trouble. >> that's what traders know this week and why it's about to get

worse. i'm melissa lee. these are the traders in times square. with apple looking to buy beats electronics for $3.2 million, what's the next megadeal in the text space? what's app, tumblr, the private companies. what about the public companies? >> let's take a step back and see what happened. the market went sideways. think about the nasdaq, high-flying stocks. you had the twitter ipo lockup, it careened down 20%. and then the alilbaba deal, the biggest ever. and then the biggest market cap in the world buying beats by dre. it just seems like there's a lot of tech stuff going on.

if you're thinking about it with not so yorosy glasses, it's not great. >> this is a frenzy, late stages of a bull market. valuations above their historical averages. everybody's fired up. look what happens when bad news comes out, they get absolutely eviscerated. this just feels like a late stage to the second tech 2.0 rally. >> i think google and facebook are going head-to-head, they're like a couple of kids in the sand lot. they want to buy the companies before they're public. they're racing to put a stake in the ground and get these names. it's a little bit more like what happened in the cloud space with hp and dell trying to buy the cloud names. worked out great if you owned them, but not for hp and dell. they are relatively small,

expect for whatsapp. not something to worry about. >> the original question, what about the market. >> you see the momentum stop, and these are cheaper targets potentially, right? >> the beats thing may not happen. their streaming music service has 500,000 paying users. this is not apple's m.o. they don't buy versus building. you think about what's going on, they chose one of the smallest players in the market. if this is going to happen, somebody, maybe it's google or facebook, may want to leapfrog the next one, or amazon. that's what brings me to pand a pandora, a publicly-traded company with 76 million users. you want to become a player. that's what you do. >> orspotify. >> that too. you said it, it's $4 billion.

pandora, market cap about $4.5 billion. it's been wut in half since early march. but here's a big but, fives times sale. yelp has a little bit like four times market cap. you could make an argument this is a kind of cheap new economy company. >> this is one of those -- i mean, first of all, doesn't everybody know somebody on pandora all the time. in my house, did somebody forget to hit the but tton? still there? this is going all the time. it's an interesting business model. and five times sales, a lot of tech names can have astonishing margins. let's get 40% margins. that's not off the charts. at five times, that's a reasonable multiple if they can achieve that. plus growth and a big footprint.

>> what's the trade? >> you got it, lady. so -- let me just tell you. today, i'm not a fan, i'm short zillow and internnetflix, but id be in play and reasonable. and it could be the sort of acquisition target that makes sense for targeted players. when the stock was 22.5 today, i looked to september and bought the september 2835 call spread. i paid a dollar for that. i need a massive move, to 29, just to break even this september. but let me tell you something, this is the sort of thing, if they're going to pay, they're not going to sell for much below the previous highs. that's a 30, 40, 50% premium. i wanted to get out of the money, risk one dollar to possibly make six between 29 and 35.

i have shorts on, this is a speculative trade. generally don't do deep in the money chunky bets on speculative. >> he makes a great point this is speculative. he's playing for a takeover, but not an outright call. bet on a speculation, buy a bunch of calls. he is making a smarter bet and reducing the cost by a third by turning it into a call spread. i think that buying calls or call spreads is the only way. look at the chart, it's ugly. hit 40, roll over convincingly, lower highs and lower lows. it's because it's a takeover candidate. he's risking a buck to make six. good deal. >> what do you think would buy it? if pandora is a potential takeout candidate. who's the buyer? >> amazon, maybe you have a merger with netflix.

there's a ton of things. this is the point about the market and the craziness in tech, we don't know what's going happen. if they're going to get weird, they're going to get weird. >> or amazon, use the stock as currency, it makes sense. it's hard to believe, might be a credo. >> and consumer staple stocks have been the best performers. and we see more to come. tom back at headquarters with this. >> coca-coloca-cola, prok or g. and we saw them in the options market. two times as many bullish spreads traded as put option. and coke, four for every put. the volume wasn't necessarily huge, but there's bullish speculation in the consumer staple companies. this is a sector up 4% on the year. far outpacing the broader market

overall. some of these big names, especially consumer staples showing nice options action. back to you. >> the question is the bullish traders right. go to the chart master, carter worth. what do you see? >> this is a fear-based approach to markets. people who don't like what they see but have to be long. big pension plans and so forth, they buy defensively. usually it comes to an end. take a look. here is, just to set it up, going back to the early 1980s, the sector, staples versus s&p. it's an epic period of outperformance over that time frame. you have to wonder what's left in the trade after that. but more immediately, the strength of the last six or eight months has taken us above these well-defined lows and highs of the channel. you can see this, yes? and mean aversion is a powerful principle. to overshoot this by all acco t

accounts implies there's a revisiting of the top of the channel, about a 10% move from here. here is the index again. and i would, if you will, draw the line like this,ed the top o thing. and again we're thinking back like this. one other way, this is a five-year chart since the current bull market began, and this is the xlp, the instrument you can trade. you can see how well-defined the channel is. it responds beautifully over and over and over. when you overshoot the top, you have the tendency to be in revert. we're looking for a 10% decline back to or to the middle of the range. for fun, talk about fear in number form, kraft, general mills, proctor, you know the names. look at ps. the average is 21. and this is earnings growth over the past year. the results are zero. zero. and yet people are willing to

pay that kind of price for this. it's a fear-based kind of behavior, and it comes to an end more often than not. >> not even keeping up with inflation as far as earnings growth. does this seem familiar? i think we did this exact same thing about a year ago in the staple stocks. the spear trades, they track u.s. ten-year treasuries. everybody running into them, and then the corporate earnings falls. i just don't see how anybody would want to chase this trade. where are they going? i think he's right, probably people wanting to maintain a bullish stance. that's the call buying you are seeing there. but the smarter bet is on a downside move. with an equity market downdraft, even the safe stocks are pulled down, not as much as the high fliers. but they will drop. >> simple trade. >> pay $1.15, staples,

relatively low volatility. the options are cheap. this is a situation where on the index it's cheaper. this is a cheap way to make a bearish bet. >> it's cheap. given the price action, i want to press weakness here than pick tops. if you want to go after the staples, i get that. that costco, i'm long puts in that. that trading at 25 times given the growth and the technical setup is a disaster. i'd rather press the weakness than pick a topic. >> but press the weakness, you're going to sell bottoms in some of the names that have rolled over. i think mike is absolutely trying to pick a top. that's the case. but doing it really inexpensively. if you think that it's not going to go down, you might think sideways and get a call spread. you don't collect much and risk a fair amount. mike is doing the other thing. risking a buck -- >> your book.

>> he's only spending a buck 15 and going to the fall. >> send us a tweet at cnbc options. we will answer after the show on the website. in addition to scot, great trader blogs, educational materials and the hottest things. believe me, it's hot. here's what's coming up next. >> what do tesla shares and these people have in common? they're both doing the electronic slide. but it's about to get worse for the car maker. we'll tell you why. plus, why traders are betting big on a twitter turn around. >> a bold strategy. >> because if facebook is any indication, twitter could move higher. we'll tell you how to profit. ♪ [ cows moo ] [ sizzling ] more rain... [ thunder rumbles ] ♪

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[ 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. #epicfail. twitter shares getting creamed on this expiration. since the start of the year, lost half of the value. dan has been bearish, but you saw interesting move today. >> it was lights out, down 20% on tuesday. a lot of traders trying to figure out the level. there was no technical support anywhere. the stock, you know, went public at 26, it went much higher. and where do you buy? one of the things that was interesting today.

the stock has been hovering above 30 since the lockup. and this morning, when the stock was 31.84, there was a trade call for risk reversal. a trader sold 2500 of the september 27 puts for 2.20 and bought the september 35 calls. that trade cost a dollar. what is he doing? between 27 and 35 on september expiration, risked the dollar, or $250,000 in premium. and has long exposure above 36. it was just at 40. that's an interesting level thinking about it going forward. if you're looking to get leverage and take advantage of the next thing here, this is really, you know, why i think kind of the traders sold the put to finance the purchase of the call. imply volatility, while it's down, it's likely to go a lot

lower when you think of the lockup expiration puts the shares in the full. and he doesn't want to own premi premium. helped to finance it. twitter, the sentiment is bad. facebook, that ipo was a bust. it's still up 18% from the ipo price. as soon as facebook demonstrated how to monetize the user base, bam, like that. this trader may be thinking about q2 report in august. that's the time they could basically demonstrate to the street they know how to monetize this thing. >> what's interesting with the facebook analogy, it bottomed in september of 2012. that was one month after the lockups which is where we are with twitter. >> another interesting thing, a prae parallel, when people turned the corner on facebook, they saw the

revenue growth. and this ipo, they thought a reasonable valuation, it was $12 million, and they had half as much revenue at that time. valued at $17 billion. it makes sense to sell some down side puts on this thing. there is going to be a level at which the people originally interested are going to buy in at similar valuations, but you have a year plus on what they can deliver. i look at situation, that's an interesting place to look at it. >> that's legit. but there's fallow money. that's what you have. no rush to do anything. after the plunge that it has, now a period of equilibrium, there's no reason to get long or short. >> that's the reason to sell puts. >> this is what the show is about. >> if it really catches, maybe i'll get the discount. >> that's great, but if you think you like it although 32 or

27, i think you're going to love it at 22. i don't see a reason that it stops. it's not facebook. they haven't figured out how to monetize mobile and won't in this quarter. it's going downhill fast. these things don't stop and turn around. they get ugly and mushy at the bottom. >> i'll button it up. i'm not that negative at 32. but before it's all said and done, i think the stop probably goes back and makes an attempt at the $26 ipo price. $200 million shares of insiders and some of the early vcs aren't going to sell. they're going to sell the next time they have the opportunity to do so and lock in games, especially if things get uglier. >> up next, twitter one the only high-flier taking a nose dive. there are concerns about tesla. how bad could it get? we'll find out when options action returns. ♪ [ bell ringing, applause ]

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after recalling its new gum. [ male announcer ] stick it to the market before you get stuck. get the most extensive charting wherever you are with the mobile trader app from td ameritrade. it was an awful week for tesla, the stock plunging 14% an reporting earnings. that was bad news for a certain pair of options action all-stars. take a look.

an options action, just because we risk less doesn't mean we make more. that's what happened with mike and carter's bullish bet on tesla. carter said they were going to accelerate. >> make the bets, we think the resolution is up and out. all right, mike thought, buying. 100 shares is $120,000 or roughly the price of -- >> a new car! >> instead, mike bought the september 2015 strike call for $25. he needs the price to rise above the strike price for more than the $25 he paid, or by 240 by september. paying that just to get into tesla? >> seemed like a good idea at the time. >> he sold the september 2015 call for 250, but the call spread, he made making money

easier. here's how. between the $12 he spent on the strike call and the higher strike call, he's cut the cost of the trade to just 12.50. mike needs them to raise by 215 or above 227.50 by september expiration. >> i love it when a plan comes together. >> me too. but sadly that didn't happen here and since the trade, it's fallen 8%, making this trade a loser. now they are barely on speaking terms, resentful on a trade gone bad. but in the acrimony, don't forget about the trade. the options action fans are asking what to do with tesla now. hopefully they can make up. answer that. carter, go to you, you got us in, what does the chart tell you? >> this was violent, quick and

bloody. what i'm looking at now in terms of levels. this is the trend line. and there's your break. the unhappy event of just the past four or five sessions. what matters from my point of view is this and this, the smoothing mechanism. we close today on the average, around 182 and change. we would use today's low as the walk away point, which is 177. if this doesn't come to life now, it's over, walk away. but give it another hour, another few points, the average after that. got a bigger problem. >> what do you do, mike? >> we're at a tipping point. one of the reasons we put the call spread on in the first place, from a fundamental standpoint, it was hard to chase the stock at the lofty valuation it has had and still has. we lost a lot less than we would have. i'm with carter. we're going to see how it

resolves, itself, if it's to the upside -- >> it's not going to the upside. it was a 2013 stock. the sentiment changed. it's going to have legs for years to come. >> everybody is waiting to figure out where the battery factories are going to be. >> it's going to be in a bmw factory. they're going to kill these guys. i love that carter is being ruthless and taking the loss. you have to do that. >> coming up next, the final call from the options pits. ♪ [ 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.

[ 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. time now for the final call, the last word from the options pit. carter. >> reduce the exposures, the no growth of consumer staples. >> take your mother out and talk about options. >> yeah, mom, sar a, happy mother's day. wouldn't buy out of the call spreads. >> mike.

>> cheap way to buy the downside in staples. >> go to our website, and also, of course, check out the daily segment inside fast every day. see you next friday at 5:30 p.m. eastern time. meantime, "mad money" starts right now. the following is a paid advertisement for starvista entertainment and time life's video collection. ♪ one day at a time, sweet jesus ♪ bill gaither's homecoming concerts have brought us songs of hope and inspiration. ♪ well, it's shoutin' time in heaven ♪ ♪ a sinner once lost is found across america... and around the world, millions have experienced these timeless songs that celebrate our faith. ♪ turn your radio on [turn your radio on] ♪