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3/16/05
'IRRATIONAL EXUBERANCE'

March 16, 2005

Speaking for myself, I'm getting a little sick of hearing about the five-year anniversary of the bubble bursting in 2000! The business news channels and even mainstream press have been hammering the observation of this tawdry time in stock market history as if there is some lesson to be learned.

I'll tell you what the lesson to be learned was, is and will always be: Don't jump into a game of musical chairs just as the number of chairs starts to decrease. I mean, even my 5-year-old daughter knows that the game starts out with a bunch of chairs and a bunch of participants and, slowly, the chairs are removed and those left without a chair when the music stops are removed from the game. However -- whether you follow stock market bubbles, individual stock bubbles, futures bubbles or housing bubbles -- for some strange reason, just when the chairs start being removed, more people want to get in the game! As I said, 5-year-olds know that's not how the game is played, but I guess that's why Alan Greenspan called it "irrational exuberance"!

CATCHING THE CHANGEWAVE -- THE MIDAS TOUCH(PAD)

My option pick this week is touchpad technology kingpin Synaptics (SYNA), and it's a great example of how things come full circle on Wall Street. Approximately one month ago, a Bear Stearns analyst downgraded Synaptics, whose technology has helped Apple's iPod to become the must-have product for the civilized world. The Bear Stearns analyst downgraded Synaptics to "Peer Perform," citing his belief that Apple would begin developing its own technology for the ubiquitous iPod music players, despite no official comments from either company. That downgrade sparked a precipitous fall from its February $41 high to about $21 in just a handful of trading sessions.

Well, to show that Wall Street's version of the circle of life is still alive and well, just on Monday, Bear Sterns upgraded SYNA from "Peer Perform" to "Outperform." According to this BS analyst (pun intended), Apple is now more likely to pursue a dual-sourcing strategy rather than ending its relationship with the touchpad technology firm. Bear's new price target for Synaptics is a range of $30 to $34, up from $25 to $28.

Now, I told you all that about Synaptics to get to the real reason I'm buying into this story. I went on my friend Dylan Ratigan's CNBC show "Bullseye" on Friday night, and I told the world that I love Synaptics!






Here's how we're playing Synaptics:

Thanks to that Bear Stearns upgrade that I spoke of, SYNA moved up to $23.10 from $22, so now we'll buy the SYNA June 25 Calls (QYGFE) and sell a like number of SYNA June 30 Calls (QYGFF) for a net debit of $1.15. Yes, we're buying a $5 bull-call spread for just $1.15, and that's all we're risking on this exciting, but volatile, stock. Do-it-yourselfers can pay $2.10 for those June 25s and sell the June 30s for 95 cents.

A 10-lot trade will set us back $1,150, but compared to the $23,100 you'd have to plunk down to buy the stock, I'd say we've got a bargain! And if that Bear Stearns analyst and I are right about SYNA being above $30 and it gets there by June expiration, then your $1,150 investment will be worth $5,000, or a profit of $3,850.

To make a limited-risk investment in Synaptics, I recommend buying the SYNA June 25-30 bull-call spread for a net debit of $1.15.

TRADE DETAILS
All information is based on prices as of 11:30 a.m. Eastern on Wednesday, March 16, 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 $1.30 for the SYNA June 25-30 bull-call spread through Wednesday, March 23, as long as Synaptics shares trade for $22.75 or higher.

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

Underlying Stock: Synaptics (SYNA)

Current Stock Price: $23.10

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	SYNA June 25 Call	$25	QYGFE	-$2.10
Sell	1	SYNA June 30 Call	$30	QYGFF	+$0.95
		Net Cost			-$1.15

*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 $1.15, 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 $1.15, or $115 for each spread. (For those of you who are do-it-yourselfers and make the trade online, an order to buy the SYNA June 25 Calls (QYGFE) for $2.10 while simultaneously selling the SYNA June 30 Calls (QYGFF) for 95 cents puts you in the trade with a net debit of $1.15.)

As always, our loss is limited to that $1.15 we are paying for the spread. If, on the other hand, SYNA rises above $30 on June expiration, then we make $3.85 on our $1.15 investment!

SUMMARY

With Synaptics trading for $23.10, a 1,000-share position would tie up $23,100. However, with our trade you'll be able to put just $1,150 at risk and have a potential gain of $3,850 if SYNA 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 SYNA June 25 Calls ($2.10) and our credit on the SYNA June 30 Calls (95 cents), or a net debit of $115 per contract.

* With SYNA trading at $23.10, a 1,000-share position would cost us $23,100.

* Instead, if we buy 10 of the in-the-money SYNA June 25 Calls (QYGFE) for $2.10 per contract ($2.10 each times 100 shares = $210 per contract), or $2,100 and ...

* Against that purchase, we sell 10 of the out-the-money SYNA June 30 Calls (QYGFF) for 95 cents per contract (95 cents each times 100 shares = $95 per contract), or $950.

* Thus, on a 10-contract spread we have only $1,150 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.15 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 $115 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 $1.30 for this spread trade through Wednesday, March 23, as long as SYNA shares trade for $22.75 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 Synaptics shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $26.15 level. Likewise, while the stock is under $26.15, 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, $1.15.

Breakeven: $26.15

The breakeven is $26.15 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.15 in this case) to the strike price of the call you are buying. Again, because we paid $2.10 for the SYNA June 25 Calls and took in 95 cents for the sale of the SYNA June 30 Calls, our net out-of-pocket is $1.15. You add that net to the strike price we’ve purchased ($25) and you get your breakeven of $26.15.

Max Profit: $385 per spread ($3.85 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 ($1.15) and is therefore $3.85. Thus, if SYNA is $30 or higher on expiration, the spread will achieve that $5 max and, since we paid $1.15 for the spread, that would leave us with a $3.85 profit, or 234.78%. On a 10-contract spread, that would translate to a profit of $3,850!

*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 Synaptics, you’d buy 10 of the SYNA June 25 Calls and sell 10 of the SYNA 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.

BUY LIST UPDATE

Both our Avaya (AV) March 15-17.50 and our VCA Antech (WOOF) March 22.50-25 bull-call spreads are expiring on Friday. Avaya and VCA Antech are substantially beneath our long strike prices, so it would take an extraordinary event to move them high enough to make either worth anything. Unfortunately, we will let these expire worthless and work for better results going forward.