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1/19/05
THE WAITING OF THE BULLS

January 19, 2005

The market basically marked time last week, although we did test key support for the Dow on two occasions before the index headed back above that 10,500 level.

That alone might not be enough to get the bulls off the sidelines, but according to the Investors' Intelligence survey of stock market advisers, the group is reporting that 62.9% of its members are bullish, the highest reading since February 1987. That's February of '87, not September or October, so you may want to dust off a chart from 18 years ago and take a look at that period of time to see what happened. Suffice it to say, the market moved up rather nicely!

Thus far this week, the market has celebrated the departure of the chairman of May Department stores, with the parent company of Marshall Field's and Lord & Taylor rallying more than 18%. A similar cheer went up from investors over at Krispy Kreme Doughnuts (KKD), when Chairman Scott Livengood (I kid you not. I bet he has been "living" up to his name!) was ousted and his former company's shares surged 12%. Ouch! Nice to see you leave.

WHAT THE OPTIONS MARKETS ARE TELLING ME

Two stocks that popped up on my watch list this week were Toys "R" Us (TOY) and UNUMProvident Corp. (UNM). The questions facing TOY involve separation of the parent from its Babies "R" Us units, and all of us on the street are speculating just how many store closings will be part of that package. As usual, traders hate uncertainty and that uncertainty breeds volatility, so it's not surprising to see TOY jumping to more than double its pedestrian 15% historical volatility and trading up around 36%.

In a completely unrelated field, insurer UNUMProvident was forced to send out 215,000 notices to policyholders who had disability claims against the insurer dating back to 1997. The settlement, which also cost UNUMProvident a $15 million fine, faulted the company for denying claims based on its heavy reliance on in-house medical professionals and for failing to consider the cumulative effects of multiple disabilities in some cases. Volatility in UNM is nearly triple its 30-day historical level of 20%, moving up to and through 51% on Friday.



CATCHING THE CHANGEWAVE -- WE SEE THE LIGHT

Here is a great candidate for our latest ChangeWave Options Investor spread trade: Cree (CREE)!

I know some of you are holding your noses as you read this, but despite the earnings disappointment, our guru Toby isn't dumping Cree, he's recommending that subscribers add to their positions! In addition, I agree with our beloved Mr. Smith that this is truly a short-term screw-up that masks the long-term story.

That story is the transformation of the cell phone into a digital communications platform for the world. 3G wireless is now a reality, and when the wave hits the domestic market, as it has already done in Europe and Asia, I think this leader in both market share and patents for the light-emitting diode (LED) will rock!






As usual, the great news about playing Cree this way is that $1.70 per contract is all we're investing -- not the $25,200 that a 1,000-share stock buyer would have to plunk down! And with Cree trading at $25.20, we've got 20 cents of intrinsic (in-the-money) value built into the spread, so our extrinsic premium is $1.50 per contract. A move to $30 or higher by the June expiration means we make $3.30 on this $1.70 investment, which would be a very tidy return in less than six months!

TRADE DETAILS
All information is based on prices as of 11:45 a.m. Eastern on Wednesday, Jan. 19, 2005.

NOTE: This example follows the most current prices available to us at the time of publication. You can still enter the trade at up to $1.90 for the CREE June 25-30 bull-call spread through Wednesday, Jan. 26, as long as CREE shares trade for $25 or higher.

Here is the information you need to know to buy our Cree bull-call spread for profits:

Underlying Stock: Cree (CREE)

Current Stock Price: $25.20

Trade Type: Bull-call spread

Options to Trade: The specific trades to make are in the table below...

Action	Quantity	Option	Strike Price	Ticker	Investment
Buy	1	CREE June 25 Call	$25	CQRFE	-$3.40
Sell	1	CREE June 30 Call	$30	CQRFF	+$1.70
		Net Cost			-$1.70

A minus sign (-) indicates an amount you pay; a plus sign (+) indicates an amount you receive.

Making The Trade:

If you give this trade to your broker at a net debit of $1.70, then it doesn't matter which prices your broker pays for the individual parts of the bull-call spread. Thus, our net debit would be $1.70, or $170 for each spread. (For those of you who are do-it-yourselfers and make the trade online, an order to buy the CREE June 25 Calls (CQRFE) for $3.40 while simultaneously selling the CREE June 30 Calls (CQRFF) for $1.70 puts you in the trade with a net debit of $1.70 to you.)

SUMMARY

With Cree trading for $25.20, a 1,000-share position would tie up $25,200. However, with our trade you'll be able to put just $1,700 at risk and have a potential gain of $3,300 if CREE rises to $30 or higher.

Here's why:

Our net investment on that bull-call spread is the difference between what we paid for the CREE June 25 Calls ($3.40) and our credit on the CREE June 30 Calls ($1.70), or a net debit of $170 per contract.

With CREE trading at $25.20, a 1,000-share position would cost us $25,200.

Instead, if we buy 10 of the in-the-money CREE June 25 Calls (CQRFE) for $3.40 per contract ($3.40 each times 100 shares = $340 per contract), or $3,400 and ...

Against that purchase, we sell 10 of the out-the-money CREE June 30 Calls (CQRFF) for $1.70 per contract ($1.70 each times 100 shares = $170 per contract), or $1,700.

Thus, on a 10-contract spread we have only $1,700 invested, so that's all we can lose!

If you follow these guidelines, this means your broker can pay no more than $1.70 and you avoid the risk of “legging the spread” -- that is, buying one side and waiting to sell the other.

NOTE: Keep in mind that nobody knows your risk tolerance or financial situation better than you. A single bull-call spread in this example will cost you $170 plus commissions. As long as you maintain the ratio of one contract purchased against one contract sold, you can ramp up this strategy as big, or as small, as you'd like.

Remember, you can pay up to $1.90 for this spread trade through Wednesday, Jan. 26, as long as CREE shares trade for $25 or higher.


TRADE PROFITABILITY ANALYSIS

Here's how we figure out how much money we can make on this trade:

To illustrate how and where you will make money on this trade, I have included a payoff diagram at the start of this section. You can use this to follow along with my explanation below:


If you look at the shaded areas as they compare to the horizontal axis that tracks the price of Cree shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $26.70 level. Likewise, while the stock is under $26.70, we are below the section (red area) where the bull-call spread registers a profit.

As with any 1-to-1 bull-call spread, our risk is limited to what we pay for the spread -- in this case $1.70.

Breakeven: $26.70

The breakeven is $26.70 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.70 in this case) to the strike price of the call you are buying. Again, because we paid $3.40 for the CREE June 25 Calls and took in $1.70 for the sale of the CREE June 30 Calls, our net out-of-pocket is $1.70. You add that net to the strike price we've purchased ($25) and you get your breakeven of $26.70.

Max Profit: $330 per spread ($3.30 x 100 shares)

The max profit is determined by taking the difference between the two strikes of the bull-call spread, which in this case is $5 ($30 – $25 = $5) and subtracting the amount we paid for the spread ($1.70) and is therefore $3.30. Thus, if Cree is $30 or higher on expiration, the spread will achieve that $5 max and, since we paid $1.70 for the spread, that would leave us with a $3.30 profit, or 194%. On a 10-contract spread, that would translate to a profit of $3,300!

This analysis does NOT include the cost of commissions while executing your trades. Please see the note below about commissions.

OPTION COMMISSIONS

If you use a full-service broker, you may pay as much as $8 per contract with a 10-contract minimum. The broker uses a minimum to cover its cost of mailing the statement out to you. If you've agreed to electronic notification via e-mail, then you may negotiate both lower commissions and elimination of that minimum.

If you wanted to simulate a 1,000-share position in Cree, you'd buy 10 of the CREE June 25 Calls and sell 10 of the CREE June 30 Calls. This 10 x 10 bull-call spread could run you as much as $160 ($8 x 20 contracts). On the other hand if you trade online through a discount broker, you could pay less than $50.


REVIEW OF OPEN POSITIONS

EDITOR'S NOTE: All open positions can be tracked at our Web site by visiting the following link: www.changewave.com

GILEAD SCIENCES (GILD) AND CISCO (CSCO)

Both of these bull-call option spreads will expire worthless on Friday unless the shares manage a surge of 10% or more.

INTERNATIONAL GAME TECHNOLOGY (IGT)

The shares are at $33.58, and any move higher goes directly into our pockets becuse we own the IGT Jan. 30 Calls (IGXAF) and are short the IGT Jan. 35 Calls (IGXAG). (Right now we're showing a 60% gain on the trade.) We'll hold on for at least another day, but look for an update tomorrow.

BE MY GUEST AT THE NEW YORK TRADERS EXPO FEB. 12-15

The entire ChangeWave team including Tobin Smith and Bryan Perry will be in New York next month for the Traders Expo, and we'd like you to be our guest. You can sign up now for free using the link below and meet each of us at the beautiful Marriott Marquis Hotel in New York City, Feb. 12-15.

I will be speaking at several workshops during the show and giving presentations at the ChangeWave booth (5804-5806) with Toby and Bryan. Here's one of the hot topics I know a lot of you are interested in that I'll cover at my session:

How to Trade the New Gold and Oil Options: We all know gold and oil are the two busiest markets in the world, but until recently, the only way to trade them was through a futures account. Now the securitized contracts similar to the QQQ and SPY are out on both gold and oil, you can trade these through your securities account! I'll detail the strategies for trading these volatile contracts! Bullish, bearish, you name it -- I will outline prudent strategies to profit with limited risk. Don't miss it! We'll look at some of the key indicators for a good “short” trade as well as the stocks I think are due for a fall.

In addition to meeting and discussing trading strategies with me, the Traders Expo offers free classes in both the exhibit hall and in various meeting rooms that are just a few steps away from the action.

More than 30,000 traders and investors have attended the Traders Expo over the past two years, many of whom never miss a show! Come join the ChangeWave gang -- Toby, Bryan and myself -- and discover why the New York Traders Expo is one of the top traders events of the year.

For complete details on how you and a companion can gain FREE admission to the New York Traders Expo, call 800-970-4355 and mention priority code 003929 or click on the link below:

changewave.com/rdr

Don't forget to mention ChangeWave when you sign up. See you at the Expo!