people first, then money, then things. now you stay safe. here we go. stand back, everybody. whoa! ♪ this is "options action." tonight new tech versus old tech. >> what are you talking about? >> ibm tanks, investors flock into facebook and linkedin but could they be making a mistake? we'll have a special report. while everyone was watching google. >> did you see that? >> there's one sector who's under cover rally has just begun. we'll tell you what it is and how you can cash in. and get ready for a bombshell. >> i am your father's brother's nephew's cousin's former roommate. >> no, not that kind of bombshell. we're talking about netflix

earnings and we'll explain why traders expect a huge move on monday. the action begins right now. live from the new york nasdaq markets in new york city, i'm melissa. keep it classy. it is the investment equivalent of the mile high club, thousand dollar stock prices, google doing what apple could not and joining priceline as one of only two stocks in the s & p with a four digit price tag. begging the question, when will apple join this grand party that is the tech rally? let's get in the money and find out. let's start on the desk and mike, to what extent do you think google is benefiting from apple's woes? >> i'm not sure it's benefiting from apple's woes. i think the problem with apple, people recognize that that's a consumer electronic story. google's story is catching people a little bit by surprise. one of the things we keep coming back to with apple is you know, the law of large numbers. we keep thinking that's a problem. the other potential problem is compressing margins, the others

potential problem, we're listing a bunch of them now, you suddenly get a trend, their products aren't hot anymore. with google it's hard to see who would be potentially replacing them. that's why a lot of us get surprised when we see performance like we did this week. >> i'm glad you brought up law of large numbers, you look at priceline, they hit that $1,000 mark, surpassed it and managed to hold on to it. but the market cap differentiation between priceline and google is enormous, priceline is only $53 billion in market cap. so law of large numbers really could be the concern as opposed to the share price. >> yeah. i don't find the share prices too interesting to be honest with you. when you think about google today, it almost gained the market cap of priceline in one day. okay. so when you think about apple, i mean, this is a company that, you know, the law of large numbers really hit this company from a sales and earnings perspective, you know, about a year, year and a half ago. they've been growing so fast for so long, that they just couldn't maintain that growth.

you know, this year, 2013, it's going to be the first earnings decline for apple in more than 10 years, and so, you know, where is the stock right now? you know, it's down 4.5% on the year. it hasn't been up on the year since january. it's really been in the dog house. there's been negative story after negative story. finally we have big hedge fund honchos in the name not for the products, but more for a financial engineering trade. and so to me, the thing sets up kind of interesting here, when you think about the fact that google can gain $45 billion in market cap in a day, and apple can't get out of its own way. i think the next couple weeks are going to be very telling for apple if it can get back up on the year and possibly back up towards 555 which was the high of the year in early january. >> right. and of course, this coming week, there's going to be a big apple ipad event which a lot of investors will be watching. scott, you know, when we got earnings last week from verizon, the ceo made comments about the 5c, the colored phone, being overstocked and maybe not enough

inventory on the higher-end phone. so maybe it is apple not able to get out of its way. >> that's right. i think that they reduced their own margins, they said we'll sell a bunch of lower margin phones when they should have not done that. it's still a premiere product. but the stock is not trading at a premiere price. on a valuation basis it's half that of google, about a third of that of priceline. dan makes a points about the financial engineering because it doesn't look that cheap if you strip the mountain of cash out of the company. and then you look at the valuations. but the company is also having a problem in that investors have memories, and they see it was at 705 not that long ago. they're just not really it interested in getting caught up in some sort of apple race back to 705 because they don't think it'll happen any time soon. >> right. i want to look at the charts here and bring in carter, back in june when apple hit its low carter said apple was a buy and would outperform the market for the year. carter, do you still like apple? >> i do a lot. in fact my work suggests there is plenty of upside. let's look at the charts.

what's important about charts is they are interpretive. just as fundamentals are. some people like apple fundamentally, some don't. so, too, it is with charts. let's look at a few. i'll go, before i draw and show you things that are interesting, here's a chart drawn one way. here's another chart same time frame. here's another chart, here's another chart, it's all the same chart but different drawings and all says the same thing. here we go. the main objective is that we have had a well defined down trend. when we broke above the down trend and we went back to it, we didn't violate that law. that's key. if you look at that line and what happened next, that low there is also the low of june. so you have very important double bottom. it happened there, it happened there and that's what that drawing is. let's do it another way. you can also call this a well defined rounding bottom. the principles are the same. this is how a bearish to bullish takes form. or you can draw it this way, which is to say, here is the cup, here's the handle, but this kind of resolution where you have a lot

of tops here, this implies fairly big conclusion. where? this is where i think we're going. this is the plunge. 705 to 385. a 50% retracement would take you to about 545, 550. interestingly, if you were to draw the trend line from which it broke, here's the next chart. that's exactly where that implies, that you get to about 445, 450. we think you've got to be long on apple here. >> got to be long. dan, what's the trade at this point? >> yeah. i actually agree with carter on the technical setup. next week, like you said melissa, october 22nd ipad event. i think the stock consolidates. around that. i think it's going to be a kind of evolutionary product that investors will be slightly disappointed with, but i don't think the stock will get killed like it did after the iphone event. to me, the main event is actually the earnings, on october 28th. so what i want to do is do a call calendar. and today, when the stock was 508, i bought.

the october 25th, next week expiration, november 1st, the following week expiration, 515 call calendar. i sold one of the october 25, 515, strike calls at 350. i bought one of the november 1st 515 calls for $11. that cost me 750. that's my max gain. what i want to happen, next week on expiration i want the stock to be 515 or a little lower, and then i own that november 515 call for the earnings. i agree with carter. the slightest bit of good news i think you get the stock back unchanged on the year or possibly 555, the high of the year. so i see maybe 10% of upside, if the company does not disappoint next two weeks from now. >> mike, you like the strike? >> first of all i love calendars. this one is a little close on both expirations, you know, typically speaking i like that long option to be a little further out. but look, from a fundamental standpoint, carl icahn is involved, the effects of some financial engineerings, talking about with so much cash on the balance sheet is pretty astonishing. so it's very hard to be bearish

about apple with this going on. >> we have a lot of big companies set to report earnings next week. options traders are keying in on web high flier netflix, for more let's go to kayla tausche at headquarters. kayla? >> hey, melissa. net knit is set to report earnings after monday. what do traders expect to see? a bombshell. options pricing imply 11% move on the report and history predicts even more dramatic reaction. over the past eight quarters, netflix shares moved an average of 22% off the company's earnings reports. in fact, in this year alone, netflix has seen 24% and 42% post earnings moves, both of them to the upside. and they only move smaller than 11% came last quarter when the stock dropped but only 3.5%. judging by the past, third quarter could mean a great deal for this stock and for traders that are involved. back to you. >> all right. thank you very much. kayla tausche. mike, what's your take on netflix? >> i said this many times. this is a fundamental story i just can't get behind. i don't understand it. we are talking about carl icahn,

icahn enterprises one of the largest shareholders in netflix. i'm not sure what they are up to. but before you try to follow them into the stock, bear in mind they started to purchase this stock at much, much lower levels. they actually had their big first significant reported -- this thing was below 75 bucks, most of that position was acquired below $100. so they've actually had it in the meantime i would think, if anything, they will start peeling out of it. 88 times earnings, think about it, even if they got their top line revenues in their space, if they get all the content up to the level that disney has, based on their current margins they are trading 35 times that number. >> so you are positioning for a downward move? >> i am positioning for a downward move. can't short the stock, there's a big short interest, plus carl's involvement. the answer here in high volatility stock, sell premium for that you are buying. i'm looking at the november march 275 calendar put spread. i'll sell the november 275 put for 4.50 bucks. i'll use proceeds to finance the march 275 puts at $18.50.

bear in mind, this looks like it's down significantly. this is a stock that has moved substantialal on earnings and just in general. the last time the stock got over $300, and then collapsed about 70%, we were seeing moves in a 30 day time frame in the 20 plus percent move, over 60 days, 40% moves is the kind of thing you expect out of a stock if it starts to fall out of bed. i just want it own puts for this thing in the long term and i need to finance them and this is how i do it. >> dan? >> i'm not a fan of that story either. i think the way mike is trading it, if he wants to look down, this is the way to do it. i wouldn't short the stock with your money. the story is one of these go go names, a lot of momentum behind it. when icahn releases that 13, this will crater. i like this as an options trade. >> scott? >> you have to do something that gets math on your side if you make a counter trade like this with implied volatility at 60%, you have to do something like this. and mike has the opportunity to turn this into a super calendar once that november put expires.

he could sell the december put, when that expires he could sell a january put and really make the math pull off. >> got a question out there send us a tweet @cnbcoptions. scott is taking a look at the spy. you'll see great trader blogs, educational material and exclusive trades, so check it out. here's what's coming up. ♪ talk about being anti-social. >> shut up! >> shares of the social giant linkedin have tanked of late. they see an opportunity and they'll explain. plus which one of these celebrities is dying to call into the show. >> but they won't. >> "options action" is taking your calls when we come right back. [ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ but then, one day, he noticed that everybody could have a magic seashell. [ indistinct talking ]

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pplause ]get live squawks right in your trading platform five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs.

six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade. welcome back. everyone was oogling google and tech names. what does that mean for the market and what names are worth checking out? let's call to the charts with the man some call the picasso of the y and x axes, carter. of oppenheimer. hi. >> it is a great smart board. it brings things to life. let's bring the steel story to life a little bit. what we have going on is something important at the weak end of the market. we know what's going on at the strong end. strong stocks are getting stronger, the linkedins and googles. there is development at the weak end, going on in a washed out area like steel.

so this is the official steel index, as determined by standard and poors. it has newport, u.s. steel, alleghe allegheny, so forth. but what's important, just like apple, once you're in a down trend, you stay in a down trend. and if you do violate to the upside, that doesn't mean anything unless you stay back above it. when you revisit, that's the key. it stays above trend. and then bounces again. so the key is it hits that line and doesn't go back below it. now, take a look at cliff natural, which is one of the most beaten up of all stocks, literally having plunged from highs of 100 or better. but it's the same circumstance of a down trend, that now we've moved above that trend. and we have all of the hallmarks of what i would characterize a bearish to bullish reversal, to put this down trend in context longer term, and to move above it, take a look at the long-term chart. that's the key. we've now moved above what has been a well-defined disaster frankly for quite some time.

and then here also what's important. notice how that is happening at the '09 lows, take a look at this chart. you can draw it this way. this is very important. the fact that this action here over the last six months is happening not randomly at a pass low, and that it's breaking the down trend line, that's big stuff. you've got to be long on a stock like this. >> got to be long. mike, you know the cliff story lines up with the data points we're getting out of china, with the global story, and the stories like industrials from ingersol rand, which hit new highs today. >> that's exactly right. we have one of the situations that's going on in steel, there's a big bull/bear debate going on here. but it looks like things are bottoming out. this is a heavily leveraged name. what that means, small changes in your view of what this whole company is worth translate to huge moves potentially in the equity. i think a very simple thing to do in these types of names, especially when options are expensive, as they are in stocks like this, just go ahead and make sure that you're not laying

out a lot of premium, if you make a bet like this. i'm taking a look at that low, that it bottomed out at. all i'm going to do here is put on a call spread risk reversal. you're buying a call spread, helping finance the call spread purchase by selling a put. the one i'm looking at specifically is the december 20, 24, 28 call. i'm going to sell the december 20 puts for 85 cents, i'll buy the december 24 calls, spend 1.40 and sell the december 28 calls. for 45 cents, that's a net debit of 10 cents, basically what i'm doing is looking for it to shoot up to 30 bucks, and on the down side of course i'm using that lower strike where the stock bottomed out. this was a stock that has probably made $45 in earnings over the course of the last ten years. and was making 12 or so in about 2011. so there's a lot of potential upside. rounding the corner. free cash flow next year. >> coming up next, a battle royal for your money, old tech versus new tech, our buck rogers versus irobot in case you're confused by the video. stay tuned.

[ male announcer ] once, there was a man who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ 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.

[ bell ringing, applause ] five tech stocks with more than a 10%... change in after-market trading. ♪

all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade.

welcome back to "options action." time now for total recall, where we take a look back on open trades that have yet to pan out and give you the next move. now a couple weeks back carter made a bullish bet on linkedin. unfortunately shares of the social giant have fallen. he didn't lose money and here's why. on "options action" it's how we stay connected. risk less so we can make more and that's just what carter tried to do. carter thought shares could see upside. >> 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 the others. play for that third gap. >> mike thought he might be on to something. buying 100 shares of the professional network would set you back more than 25 grand. >> what a predicament. >> so to make a bullish bet mike instead sold the november 250 strike put for $19. but in order to keep all that money mike needs linkedin

shares to stay above the strike of that put that he sold by expiration. or in this case above $250 by november expiration. but if shares do fall, mike won't see losses until linkedin drops below that 250 level by more than that $19 he collected. or below 231 by november expiration. but there's a tradeoff, because by selling that put, mike could be forced to buy linkedin stock for $250 a share, even if it falls well below that level. >> you guys really are cowboys. >> that's right iceman. to protect himself from that, mike bought the november 240 strike put for $14.50, created his put spread. but he did something else. he put the odds in his favor. that's because between the money he collected on the higher strike put and the money he spent on the lower strike put, mike took in a credit of $4.50, meaning he did something even the most connected can't do, make money whether shares of the

social giant go up, down or nowhere at all. but in order to keep all that money, mike needs linkedin stock to stay above 245.50 by november expiration. below that level, he will see losses. but they are capped to the strike of the put that he bought. >> smile boys, we're about to retire. >> not really. because since the time of the trade linkedin shares have fallen more than 3% making this trade neither a winner or a loser. >> ooh. >> now carter's fancy friends are disconnecting them from their social circle shunning them at spago's and turning a blind eye on the red carpet. but guys forget about your friends. options fans all over the world just want to know one thing -- what will cohen carter do now? all right. a late day rally actually helped this trade and now linkedin shares are about flat from the time of the trade. meaning if the stock can stay here throughout expiration mike and carter would be winners. so carter, what would you do at this point? >> i think you stick this one

out. it hasn't taken out september high and the market has. we think linkedin has legs here. >> mike? >> this is where the trades math is working for us, stay with it. >> dan, i want to go to you, i want your take on this notion of old tech like ibm doing poorly while new internet stocks seem to be on fire. >> yeah. see i think you want to avoid a lot of these laggards, even ibm you just mentioned, ebay, and there's some others. but i'm not a fan of all this crap like yelp and zillow and groupon and this sort of stuff. i think a lot of people on a valuation basis would lump linkedin there. but linkedin has a good business model and continues to grow. to me it's a very different story. i'd avoid anything with a y or z. >> all right. coming up next, brad pitt is back at it trying to call into options action, but you know what, brad, we've got a bigger star after the break, and he's making the call, when options action comes right back. [ male announcer ] once, there was a man

who found a magic seashell. it told him what was happening on the trading floor in real time. ♪ the shell brought him great fame. ♪ 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.

pplause ]get live squawks right in your trading platform five tech stocks with more than a 10%... change in after-market trading. ♪ all the tech stocks with a market cap... of at least 50 billion... are up on the day. 12 low-volume stocks... breaking into 52-week highs. six upcoming earnings plays... that recently gapped up. [ male announcer ] now the world is your trading floor. get real-time market scanning wherever you are with the mobile trader app. from td ameritrade.

welcome back. time for you make the call where "options action" takes your questions and tonight we have a very special guest. it's not brad pitt, perhaps next week. but we do have mateo, a french student living in paris, when he's not inhaling croissants he's watching "options actionp." mathieu, welcome to options action. >> thank you, melissa. hi, melissa. thanks for taking my call from france. i love you. i love your show, melissa. and that's why i come up with a special gift for you. it's as you've just heard. >> i'm blushing. we have to get to your question. >> my question is about i'm a european citizen, i would like to put a bullish bet and using options so i can define my risk and bullish bets and i'm looking at the december 145, 147 cold

spread. now traders, paris wants to know one thing, is it a good trade? >> scott, give paris its answer. >> that's a good trade, fxe options are incredibly cheap. implied volatility is a hat size so rather than buying a spread i just want to buy outright options. you can buy 135 call out right options, buy 135 call or 136 call and pay $1.20 that's how i would do it. >> mateo, thank you so much for calling. time for the final call, last word from the options pit. scott. >> this week's web extra is about a good call spread and a better call spread. >> dan nathan. >> i like playing apple long with defined risk into earnings two weeks from now. >> carter braxton worth. >> up long against the short of the s&p. >> mike. >> calendar put spreads and netflix are a way to buy puts and finance them. >> looks like our time has expired. i'm melissa lee for more options action check out our web site optionsaction.cnbc.com.

and check out our new daily segment inside fast money every day at 5:40 p.m. eastern time. see you next friday for more options action. "mad money" with jim cramer is up next. what you are about to see is one ladder-the strongest, the safest, the most versatile ladder in the world. the strong and sturdy little giant ladder system. twenty four ladders in one. coming up, you'll see amazing demonstrations and hear