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2/9/05
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February 09, 2005

More and more, I think I'm part of the minority. That is, the minority that likes watching the Super Bowl more than the commercials! As all of you who attended a party for the Super Bowl might know, more people choose to hit the kitchen or the bathroom during the game than during the commercials. If you doubt that fact, then consider this: according to Nielsen Media Research, Fox television had an astounding 99.2% audience retention for its commercials!

Oh well, at least I can take some solace in the idea that the nuances of the game are tougher to understand than commercials mocking wardrobe malfunctions! That said, I did think the GoDaddy.com commercial was the best of the bunch. However, even there I play the contrarian, as according to USA Today's annual Super Bowl "Ad Meter," Anheuser-Busch won the top slot for a record seventh consecutive year with its first-quarter commercial for Bud Light featuring a skydiver who tries to entice a skittish buddy to jump by tossing out a six-pack of Bud Light. In case you missed that one, the skittish pal still doesn't jump, but the pilot does!

WHAT THE OPTIONS MARKETS ARE TELLING ME

Encysive Pharmaceuticals (ENCY) is one of those crazy biopharmaceutical companies that could run up 200%, or fall back into the single digits, after news of a drug approval or denial hits the news tapes. Its endothelin antagonist is in Phase III development to treat pulmonary arterial hypertension. Volatility has jumped as high as 160%, double its already-high normal readings of 75% a month ago.

Another very high volatility stock that has made my watch list is the online travel auction site Priceline (PCLN). Priceline, like ENCY, is expected to announce earnings next Thursday, Feb. 17. Its volatility has moved up from a more pedestrian 44% to 58% in the past week. Priceline is just $3 above its 52-week low of $18.28, but given the pressure I've seen from Overstock (OSTK) to Amazon (AMZN), I must say it will indeed be extraordinary if they exceed the Street earnings expectations.




CATCHING THE CHANGEWAVE -- BYE, BYE CARLY

Let's cut through today's headlines and see what's really behind Carly Fiorina's hasty departure from her chairmanship of Hewlett-Packard (HPQ). No, it's not just differences between Ms. Fiorina and her board of directors; rather, it was Michael Dell and the company that bears his name -- Dell (DELL).

This isn't news to our ChangeWave Alliance, which continues to confirm Dell's leaderhip in its member surveys. The Austin, Texas-based PC maker has hammered HP on its way to the top spot with 17.9% of the worldwide PC market (up from 16.7%). The good news for HP is that it is in second place with 15.8%, but the bad news is that its share fell from 16.2%. As Carly learned the hard way, nobody can slow down Dell. And, given the fact that its growth is driven largely by corporate buyers, a pickup in that biz will drop right to Dell's bottom line.





The way we play this one is to buy the DELL May 42.50 Calls (DLQES) and sell the DELL May 45 Calls (DLQEI) for a net debit of 80 cents. On a 10-lot spread, you'd be putting $800 on the table, versus a 1,000-share stock purchase that would tie up $41,480. Think about that -- you're investing less than 2% of the money the stock investor has to plunk down and, yet, a move above $45 for May expiration means you make better than 212% in about 100 days! As always, with a bull-call spread like this, the risk is limited to the 80 cents per contract that you invest. Thus, a close below $42.50 on May expiration means this spread is worthless.

To make a limited-risk investment in Dell, I recommend buying the DELL May 42.50-45 bull-call spread for a net debit of 80 cents.

TRADE DETAILS
All information is based on prices as of 12:10 p.m. Eastern on Wednesday, Feb. 9, 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 80 cents for the DELL May 42.50-45 bull-call spread through Wednesday, Feb. 16, as long as Dell shares trade for $40.75 or higher.

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

Underlying Stock: Dell (DELL)

Current Stock Price: $41.54

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	DELL May 42.50 Call	$42.50	DLQES	-$1.25
Sell	1	DELL May 45 Call	$45	DLQEI	+45 cents
		Net Cost			80 cents

*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 80 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 80 cents, or $80 for each spread. (For those of you who are do-it-yourselfers and make the trade online, an order to buy the DELL May 42.50 Calls (DLQES) for $1.25 while simultaneously selling the DELL May 45 Calls (DLQEI) for 45 cents puts you in the trade with a net debit of 80 cents to you.)

SUMMARY

With Dell trading for $41.54, a 1,000-share position would tie up $41,540. However, with our trade you'll be able to put just $800 at risk and have a potential gain of $1,700 if DELL rises to $45 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the DELL May 42.50 Calls ($1.25) and our credit on the DELL May 45 Calls (45 cents), or a net debit of $80 per contract.

* With DELL trading at $41.54, a 1,000-share position would cost us $41,540.

* Instead, if we buy 10 of the in-the-money DELL May 42.50 Calls (DLQES) for $1.25 per contract ($1.25 each times 100 shares = $125 per contract), or $1,250 and ...

* Against that purchase, we sell 10 of the out-the-money DELL May 45 Calls (DLQEI) for 45 cents per contract (45 cents each times 100 shares = $45 per contract), or $450.

* Thus, on a 10-contract spread we have only $800 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than 80 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 $80 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 80 cents for this spread trade through Wednesday, Feb. 16, as long as DELL shares trade for $40.75 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 Dell shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $43.30 level. Likewise, while the stock is under $43.30, 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 80 cents.

Breakeven: $43.30

The breakeven is $43.30 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread (80 cents in this case) to the strike price of the call you are buying. Again, because we paid $1.25 for the DELL May 42.50 Calls and took in 45 cents for the sale of the DELL May 45 Calls, our net out-of-pocket is 80 cents. You add that net to the strike price we've purchased ($42.50) and you get your breakeven of $43.30.

Max Profit: $170 per spread ($1.70 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 ($45 – $42.50 = $2.50) and subtracting the amount we paid for the spread (80 cents) and is therefore $1.70. Thus, if DELL is $45 or higher on expiration, the spread will achieve that $2.50 max and, since we paid 80 cents for the spread, that would leave us with a $1.70 profit, or 212.5%. On a 10-contract spread, that would translate to a profit of $1,700!

*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 Dell, you'd buy 10 of the DELL May 42.50 Calls and sell 10 of the DELL May 45 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.