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11/9/05
FRANCE NEEDS 'JOHN WAYNE'

November 09, 2005

Watching televised reports of cars burning and young ruffians tossing Molotov cocktails at police, I was struck by just how far out of control things are in France. For many of us, it was like someone rewound the tape of New Orleans post-Katrina and added steroids.

Whether the catalyst is Rodney King, slow response to a national disaster or two kids being electrocuted while hiding from police in a Paris suburb, it's not the angry response that surprises us -- it's the government's response.

You don't have to be an admirer of France and everything French to feel horrible about what we've seen transpire across France in the past 10 days. But as I said, what really surprises me is the lack of appropriate response to this desperate situation.

Invoking a 50-year-old security law (that dates to France's colonial war in Algeria), France declared a state of emergency so it can put troublemakers under house arrest, confiscate weapons and close public spaces where gangs gather. That's a start, but what the French really need now is the man who saved New Orleans when it seemed criminals had taken over, Lt. Gen. Russel Honore.

I'm sure you remember the general, who was described by New Orleans Mayor Ray Nagin as a "John Wayne dude" who can "get some stuff done." The three-star officer directed the deployment of the National Guard troops, got food and water to the people, got the Army's Corps of Engineers repairing levies and started pumping out the flooded city. Honore is a take-charge kind of guy who many have called a hero, and that's exactly what France needs right now -- a hero.

CATCHING THE CHANGEWAVE -- LET'S TURN NICKEL INTO DOLLARS

If I've heard Toby Smith say it once, I've heard it a thousand times -- "natural resources." His portfolio is loaded with Canadian energy trusts and oil and mining stocks.

So, while I was getting ready to do a TV appearance for Fox, imagine my glee when I noticed that Distant Thunder, our proprietary option-tracking program, had picked up on unusual buying activity in Inco Ltd. (N), a metals and minerals giant. The company specializes in producing nickel and specialty nickel products, as well as copper, precious metals and cobalt.

Distant Thunder showed 7,750 of the N Dec 45 Calls trading at mid-session today (Wednesday, Nov. 9), and 91% of those trades were made by aggressive buyers paying the offer price!

The calls are up 35 cents to $1.30, while the stock is up 70 cents to $42.95. This, my friends, appears to be some fast money buying in because they think they've seen a copy of tomorrow's newspaper!




Here's how we follow their lead:

I recommend buying the N Dec 45 Calls (NLI) for $1.30 and selling a like number of N Dec 50 Calls (NLJ) for 30 cents. Thus, our net debit will be $1.

Think about that -- you are paying $1, which (like with any bull-call spread) is all you can lose. However, if that smart money is right and Inco runs, then this spread could expand to $5, leaving you with a $4 profit. I like those odds!

To make a limited-risk investment in Inco, I recommend buying the N Dec 45-50 bull-call spread for a net debit of $1.

TRADE DETAILS
All information is based on prices as of 3:40 p.m. Eastern on Wednesday, Nov. 9, 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 for the N Dec 45-50 bull-call spread through Wednesday, Nov. 16, as long as N shares trade for $42.25 or higher.

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

Underlying Stock: Inco Ltd. (N)

Current Stock Price: $42.95

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	N Dec 45 Call	$45	NLI	-$1.30
Sell	1	N Dec 50 Call	$50	NLJ	+$0.30
		Net Cost			-$1.00

*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, 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, or $100 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the N Dec 45 Calls (NLI) for $1.30 while simultaneously selling the N Dec 50 Calls (NLJ) for 30 cents puts you in the trade with a net debit of $1.

Our loss is limited to the $1 that we are paying for the spread. If, on the other hand, Inco rises above $50 on or before December expiration, then we make $4 on our $1 investment!

SUMMARY

With Inco trading for $42.95, a 1,000-share position would tie up $42,950. However, with our trade you'll be able to put just $1,000 at risk and have a potential gain of $4,000 if N rises to $50 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the N Dec 45 Calls ($1.30) and our credit on the N Dec 50 Calls (30 cents), or a net debit of $100 per contract.

* With N trading at $42.95, a 1,000-share position would cost us $42,950.

* Instead, if we buy 10 of the N Dec 45 Calls (NLI) for $1.30 ($1.30 each times 100 shares = $130 per contract), or $1,300 and ...

* Against that purchase, we sell 10 of the N Dec 50 Calls (NLJ) for 30 cents (30 cents each times 100 shares = $30 per contract), or $300.

* Thus, on a 10-contract spread we have only $1,000 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1 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 $100 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 for this spread trade through Wednesday, Nov. 16, as long as N shares trade for $42.25 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 N shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $46 level. Likewise, while the stock is under $46, 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.

Breakeven: $46

The breakeven is $46 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1 in this case) to the strike price of the call you are buying. Again, because we paid $1.30 for the N Dec 45 Calls and took in 30 cents for the sale of the N Dec 50 Calls, our net out-of-pocket is $1. You add that net to the strike price we've purchased ($45) and you get your breakeven of $46.

Max Profit: $400 per spread ($4 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 ($50 – $45 = $5) and subtracting the amount we paid for the spread ($1) and is therefore $4. Thus, if Inco is $50 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1 for the spread, that would leave us with a $4 profit, or 300%. On a 10-contract spread, that would translate to a profit of $4,000!

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