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10/26/05
HOT HOT ... BOT

October 26, 2005

The only thing hotter than the Chicago White Sox is stock in the Chicago Board of Trade (BOT), which just priced its initial public offering last week at $54 per share.

Shares of the BOT have hit record highs each day since that listing and, on Monday (Oct. 21), they traded above $134 per share. That gave the formerly member-owned, 157-year-old exchange a valuation of more than $5 billion!

Undoubtedly, some of you are wondering how they can justify such a crazy valuation. I'll offer several reasons:

The CBOT is still taking baby steps in the world of electronic trading, as electronic trading accounted for 58% of its volume in 2004, up from 52% in 2003.

The CBOT booked net income of $39 million, up 20% from 2003, with revenue jumping dramatically to $237 million.

Each full membership got 27,338 shares, and minority seats on the CBOT received progressively smaller stakes. Collectively, members hold 93% of the 52 million shares. This leaves just under 3 million shares that are not owned by insiders available for trading by the public. That puts the float for BOT shares among the smallest of any NYSE listing.

There are other reasons why the BOT and its larger competitor, the Chicago Mercantile Exchange (CME), are commanding such lofty prices, but chief among them is that both are monopolies.

A host of competitors like Eurex and eSpeed have taken their best shots at both the CME and BOT, and the former came out of the fight limping and bloody! The CME and BOT separately created trading arenas that merged actual with virtual trading. They kept their core market-making businesses while adding greater and greater numbers of retail and institutional customers -- as well as the full faith and credit of every major and minor brokerage house.

It's also important to note that the surge in both the CME and BOT shares aren't just making those insiders richer. Outside of the members of the CBOT, the big winners are looking like T. Rowe Price Mid-Cap Growth, which holds 5.58% (4 million shares) and Neuberger & Berman Genesis (1.85 million shares). Those two funds have paper profits of $316 million and $145.97 million, respectively, as of Oct. 24!

CATCHING THE CHANGEWAVE -- TURNING UP THE HEAT WITH A WINTER ENERGY PLAY

Last week, Toby Smith picked Alpha Natural Resources (ANR) to add to his energy portfolio. As you know, we have KFx Inc. in our ChangeWave Options Investor portfolio because of its K-Fuel technology, which transforms sub-bituminous coal into cleaner energy. When I saw Alpha Natural Resources appear on Toby's radar, I decided we needed to make some room for another coal player!

Just this week, November natural gas futures topped $14.40 on the New York Mercantile Exchange. With prices nearly double 2004 levels and almost triple those in 2003, you can bet coal demand will go through the roof this winter.

Alpha extracts and processes high-quality Appalachian coal out of its 65 mines with 500 million-plus tons of proven and probable reserves. The company has the capacity to raise production by 12% to 16% and I expect that, as coal demand jumps, so will the price -- thus pushing their proven reserves from $30 billion to $35 billion!

We should get a peek at their future when the company announces Q3 financial results on Thursday, Nov. 3, so we don't have to wait too long to see how right I am!




Here's how we play: I recommend buying the ANR March 25 Calls (ANRCE) and selling a like number of ANR March 30 Calls (ANRCF) for a net debit of $1.95. Prices that work for do-it-yourselfers are paying $3.60 for the March 25 Calls and selling the March 30 Calls for $1.65.

To make a limited-risk investment in Alpha, I recommend buying the ANR March 25-30 bull-call spread for a net debit of $1.95.

TRADE DETAILS
All information is based on prices as of 12 p.m. Eastern on Wednesday, Oct. 26, 2005.

* NOTE: This example follows the most current prices available to us at the time of publication. You can still enter the trade for up to $1.95 for the ANR March 25-30 bull-call spread through Wednesday, Nov. 2, as long as ANR shares trade for $24.75 or higher.

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

Underlying Stock: Alpha Natural Resources (ANR)

Current Stock Price: $25.43

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	ANR March 25 Call	$25	ANRCE	-$3.60
Sell	1	ANR March 30 Call	$30	ANRCF	+$1.65
		Net Cost			-$1.95

*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 $1.95, 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 $1.95, or $195 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the ANR March 25 Calls (ANRCE) for $3.60 while simultaneously selling the ANR March 30 Calls (ANRCF) for $1.65 puts you in the trade with a net debit of $1.95.

Our loss is limited to the $1.95 that we are paying for the spread. If, on the other hand, Alpha rises above $30 on or before March expiration, then we make $3.05 on our $1.95 investment!

SUMMARY

With Alpha trading for $25.43, a 1,000-share position would tie up $25,430. However, with our trade you'll be able to put just $1,950 at risk and have a potential gain of $3,050 if ANR 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 ANR March 25 Calls ($3.60) and our credit on the ANR March 30 Calls ($1.65), or a net debit of $195 per contract.

* With ANR trading at $25.43, a 1,000-share position would cost us $25,430.

* Instead, if we buy 10 of the ANR March 25 Calls (ANRCE) for $3.60 ($3.60 each times 100 shares = $360 per contract), or $3,600 and ...

* Against that purchase, we sell 10 of the ANR March 30 Calls (ANRCF) for $1.65 ($1.65 each times 100 shares = $165 per contract), or $1,650.

* Thus, on a 10-contract spread we have only $1,950 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.95 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 $195 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 make it as small, as you'd like.

* Remember, you can pay up to $1.95 for this spread trade through Wednesday, Nov. 2, as long as ANR shares trade for $24.75 or higher.

TRADE PROFITABILITY ANALYSIS

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 chart 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 ANR shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $26.95 level. Likewise, while the stock is under $26.95, we are below the axis (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, $1.95.

Breakeven: $26.95

The breakeven is $26.95 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.95 in this case) to the strike price of the call you are buying. Again, because we paid $3.60 for the ANR March 25 Calls and took in $1.65 for the sale of the ANR March 30 Calls, our net out-of-pocket is $1.95. You add that net to the strike price we've purchased ($25) and you get your breakeven of $26.95.

Max Profit: $305 per spread ($3.05 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 ($1.95) and is therefore $3.05. Thus, if Alpha is $30 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.95 for the spread, that would leave us with a $3.05 profit, or 156.4%. On a 10-contract spread, that would translate to a profit of $3,050!

*This analysis does NOT include the cost of commissions while executing your trades.

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