Sponsored By:
| Dow | 10,567.33 | 2.95 |
| NASDAQ | 2,358.95 | 18.27 |
| S&P | 1,145.61 | 5.16 |
- Events & Appearances
- Special Reports
- Getting Started
- FAQ
- Modify Your Account
- Glossary
- Renew Subscription
- About the Adviser
March 11, 2010
- Subscriptions:
11/16/05
BAH HUMBUG -- NOT!
November 16, 2005
If you're like me, you've noticed how early and aggressively retailers are marketing Christmas. Most of us can remember when the retailers would have their windows decorated for Halloween, then Thanksgiving and, of course, the granddaddy of all window decorations -- Christmas.
But since I've been on a very active travel schedule, I can say that from Los Angeles to New York and Miami to San Francisco, retailers skipped right over goblins and gobblers and went straight to the main course this year.
According to the National Retail Federation (NRF), holiday retail sales will grow 5% to $435.3 billion. Those sales account for as much as 40% of the annual total for some retailers, which is why the Friday after Thanksgiving is called Black Friday -- it's when retailers break into the black for the year. I love the NRF because only Yogi Berra can find as many statistics to throw at a subject, whether warranted or not!
This is what I gleaned from the rather intense NRF report:
Consumers spending breaks down like this:
How you might turn this information into actionable ideas is a bit challenging, but thanks to Paul Carton and our crack ChangeWave Alliance, I think we can demystify things a little.
Our most recent ChangeWave Alliance survey asked participants whether Santa is stuck in the chimney. What we found was that, from our August survey to this October survey, those who said they'd be spending the same amount as last year jumped from 35% to 44%, but those who said they'd be spending more fell from 44% to just 27%.
And while that last comparison seems statistically bad, try this one on for size. The number of responders who said they'd be spending less jumped from 19% in August to 28% in October. Ebenezer Scrooge would feel right at home in this scenario!
The negativity seems indeed to be centered squarely on rising energy prices, which made their stratospheric leap during the same time period as the survey. However, the statistic that I think is most telling in our most recent survey is that those saying they would cut holiday spending due to energy costs remained flat at 5% from August through this October survey!
In other words, we all talk tough about cutting back and we all love to complain about "gas pains," but there are few of us who plan to cut back. In fact, the majority (63% of our October survey respondents) said that energy costs will have no effect on their holiday shopping plans.
CATCHING THE CHANGEWAVE -- A CAPITAL IDEA
This week's trade is an investment in one of the world's most active traders of NYSE- and Nasdaq-listed stocks.
How active? This company made 822,000 trades per day for the month of October! That means that its average daily U.S. equity share volume was 3.1 billion in October 2005, up approximately 18.3% from 2.62 billion in September 2005.
That, ladies and gents, is an astounding $7.84 billion of stock per day!
As these numbers show, its business is booming and our Distant Thunder option-tracking program has picked up unusually heavy buying of the January and April 10 and 12.50 calls. The stock that's caught our eye is Knight Capital Group Inc. (NITE).
Here's how we coattail on the increased interest and bullish outlook for the Nasdaq's largest trader.
Have your broker buy the NITE April 10 Calls (QTNDB) and sell a like number of NITE April 12.50 Calls (QTNDV) for a net debit of 75 cents. Do-it-yourselfers can pay $1.30 for the April 10 Calls and sell a like number of April 12.50 Calls for 55 cents, for a net debit of 75 cents.
If you do this to simulate a 1,000-share investment in NITE, a 10 x 10 version of this bull-call spread will cost you $750.
As always, the debit (75 cents per share) is your entire risk. If NITE is $12.50 or higher on April expiration, this 75-cent investment will be worth $2.50. Thus, a $750 investment will be worth $2,500!
To make a limited-risk investment in Knight Capital, I recommend buying the NITE April 10-12.50 bull-call spread for a net debit of 75 cents.
TRADE DETAILS
All information is based on prices as of 12:30 p.m. Eastern on Wednesday, Nov. 16, 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 95 cents for the NITE April 10-12.50 bull-call spread through Wednesday, Nov. 23, as long as NITE shares trade for $10 or higher.
Here is the information you need to know to buy our Knight Capital bull-call spread for profits:
Underlying Stock: Knight Capital Group Inc. (NITE)
Current Stock Price: $10.15
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 | NITE April 10 Call | $10 | QTNDB | -$1.30 | |
| Sell | 1 | NITE April 12.50 Call | $12.50 | QTNDV | +$0.55 | |
| Net Cost | -$0.75 |
*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 75 cents, 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 75 cents, or $750 for each spread.
For those of you who are do-it-yourselfers and are making the trade online, an order to buy the NITE April 10 Calls (QTNDB) for $1.30 while simultaneously selling the NITE April 12.50 Calls (QTNDV) for 55 cents puts you in the trade with a net debit of 75 cents.
Our loss is limited to the 75 cents that we are paying for the spread. If, on the other hand, Knight Capital rises above $12.50 on or before April expiration, then we make $1.75 on our 75-cent investment!
SUMMARY
With Knight Capital trading for $10.15, a 1,000-share position would tie up $10,150. However, with our trade you'll be able to put just $750 at risk and have a potential gain of $1,750 if NITE rises to $12.50 or higher.
Here's why:
* Our net investment on that bull-call spread is the difference between what we paid for the NITE April 10 Calls ($1.30) and our credit on the NITE April 12.50 Calls (55 cents), or a net debit of $75 per contract.
* With NITE trading at $10.15, a 1,000-share position would cost us $10,150.
* Instead, if we buy 10 of the NITE April 10 Calls (QTNDB) for $1.30 ($1.30 each times 100 shares = $130 per contract), or $1,300 and ...
* Against that purchase, we sell 10 of the NITE April 12.50 Calls (QTNDV) for 55 cents (55 cents each times 100 shares = $55 per contract), or $550.
* Thus, on a 10-contract spread we have only $750 invested, so that's all we can lose!
* If you follow these guidelines, this means your broker can pay no more than 75 cents 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 $75 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 95 cents for this spread trade through Wednesday, Nov. 23 as long as NITE shares trade for $10 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 NITE shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $10.75 level. Likewise, while the stock is under $10.75, 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, 75 cents.
Breakeven: $10.75
The breakeven is $10.75 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread (75 cents in this case) to the strike price of the call you are buying. Again, because we paid $1.30 for the NITE April 10 Calls and took in 55 cents for the sale of the NITE April 12.50 Calls, our net out-of-pocket is 75 cents. You add that net to the strike price we've purchased ($10) and you get your breakeven of $10.75.
Max Profit: $175 per spread ($1.75 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 $2.50 ($12.50 – $10 = $2.50) and subtracting the amount we paid for the spread (75 cents) and is therefore $1.75. Thus, if Knight Capital is $12.50 or higher on expiration, then the spread will achieve that $2.50 max and, because we paid 75 cents for the spread, that would leave us with a $1.75 profit, or 233.3%. On a 10-contract spread, that would translate to a profit of $1,750!
*This analysis does NOT include the cost of commissions while executing your trades.
BUY LIST UPDATE
Our Millennium Pharmaceuticals (MLNM) Nov 10-12.50 bull-call spread expires on Friday. I will update you on this trade as the situation dictates, as shares have moved through our long $10 strike.
Millennium will present on Friday at the Credit Suisse First Boston Annual Healthcare Conference, so even though we have just two more days for those MLNM Nov 10 Calls (QMNKB) to move up, we are holding on!
TWO GREAT WAYS TO MEET THE CHANGEWAVE CREW!
Join me at the Las Vegas Traders Expo and the Orlando World Money Show
Now you have two opportunities to meet the ChangeWave crew face to face. On Dec. 13-16, 2005, we'll be at the Paris Resort in Vegas for the Traders Expo. We'll show you how to sharpen your trading skills and become a more profitable trader. You won't want to miss any of the informative seminars.
WEDNESDAY, DEC. 14, 2005
THURSDAY, DEC. 15, 2005
FRIDAY, DEC. 16, 2005
Along with the regular seminars, Toby, Bryan and I will be holding booth-side presentations. Toby will be at the booth Wednesday afternoon, Bryan will be there throughout the show and you can catch me on Thursday afternoon and Friday. So, stop by booth #108 and learn techniques you can use immediately in your trading. Stay turned for exact times.
Click below to get more information on the Las Vegas show and your FREE tickets.
http://www.tradersexpo.com/tradersexpo/lasvegas/main.asp?scode=004074
And in addition, you can meet us at the World Money Show in Orlando, Fla., which is being held Feb. 1-4, 2006, at the Gaylord Palms Resort. There, you'll find out the biggest waves of growth for 2006 and how you can ride them to big profits.
Click below to get more information on the Orlando Money Show and your FREE tickets.
http://www.worldmoneyshow.com/twms/main.asp?scode=005189
These are great chances for you to meet the ChangeWave team, become a more knowledgeable investor and trader and have some fun. I look forward to meeting you!
