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4/13/05
MARCHING ON

April 13, 2005

"Thank you, Chevy. Well, another winter is almost over, and March, true to form, has come in like a lion, and hopefully will go out like a lamb. At least that's how March works here in the United States. But did you know that March behaves differently in other countries? In Norway, for example, March comes in like a polar bear and goes out like a walrus. Or, take the case of Honduras, where March comes in like a lamb and goes out like a salt marsh harvest mouse. ..."
-- John Belushi, from "Saturday Night Live"

Indeed, March did come in like a lion -- reaching a peak in the S&P 500 of 1,229.06 on March 7 -- but went out like an emu (a flightless, Australian bird related to and resembling the ostrich), finishing out the month at 1,180.59, down nearly 50 handles from our monthly high. Now, one reason for the market's slide was clearly the rising energy prices, which put a de facto tax on consumers and businesses, significantly reigning in spending by both groups. Other contributing factors included the American International Group probe into their acknowledged "improper" accounting for a transaction with Warren Buffett's General Re and the flak surrounding the world's largest automaker, General Motors, suffering major losses and slashing profit forecasts. In simplest terms, the bad news has overcome the market and pushed both the Dow Jones Industrials and Russell 2000 to fresh lows for 2005.

CATCHING THE CHANGEWAVE -- TURNING THE BLUES INTO GREEN

As my friend and fellow ChangeWave team member Bryan Perry pointed out in a note earlier this week, this week's stock is one of America's bluest blue chip companies. It is also showing strong fundamental improvement from the bullish pricing environment for chemicals. A brief list of industries in which this member of the Dow Jones Industrial Average is involved includes aerospace, textiles, biotech, food and nutrition, plastics, healthcare, printing and ethanol. You have to wonder if there's anything this company isn't involved in, but it's this diversity that insulates this week's pick from some of the market volatility that has been the hallmark of trading so far this year. Our Options Investor pick this week is DuPont (DD).

We're recommending the DD July 50-55 bull-call spread to participate in DuPont's upside, but with limited risk. To establish this spread, we're buying the DD July 50 Calls (DDGJ) for $2 and selling the DD July 55 Calls (DDGK) for 40 cents, or a net debit of just $1.60 per contract.






A 1,000-share investment in DuPont would cost us $49,640, and a move to $55 would yield a $5 profit, or a 10% gain, but consider the risk as a drop to $40 would cost that investor about $10,000! However, with our ChangeWave Options Investor bull-call spread, we can simulate a 1,000 share investment in DD for just $1,600! A move to $55 in the strike price means our spread would expand to $5, which yields a profit of $3.40, or more than a 212% profit! And, while the stock investor ties up $50,000 and has virtually that entire amount at risk, our option investment means that our total risk is the $1,600 we used to buy that 10x10 DD July 50-55 spread!

To make a limited-risk investment in DuPont, I recommend buying the DD July 50-55 bull-call spread for a net debit of $1.60.

TRADE DETAILS
All information is based on prices as of 11:45 a.m. Eastern on Wednesday, April 13, 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 $1.60 for the DD July 50-55 bull-call spread through Wednesday, April 20, as long as DD shares trade for $49.25 or higher.

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

Underlying Stock: DuPont (DD)

Current Stock Price: $49.64

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	DD July 50 Call	$50	DDGJ	-$2.00
Sell	1	DD July 55 Call	$55	DDGK	+$0.40
		Net Cost			-$1.60

*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 $1.60, 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 $1.60, or $160 for each spread. (For those of you who are do-it-yourselfers and making the trade online, an order to buy the DD July 50 Calls (DDGJ) for $2 while simultaneously selling the DD July 55 Calls (DDGK) for 40 cents puts you in the trade with a net debit of $1.60.)

Our loss is limited to the $1.60 that we are paying for the spread. If, on the other hand, DuPont rises above $55 on July expiration, then we make $3.40 on our $1.60 investment!

SUMMARY

With DuPont trading for $49.64, a 1,000-share position would tie up $49,640. However, with our trade you'll be able to put just $1,600 at risk and have a potential gain of $3,400 if DuPont rises to $55 or higher.

Here’s why:

* Our net investment on that bull-call spread is the difference between what we paid for the DD July 50 Calls ($2) and our credit on the DD July 55 Calls (40 cents), or a net debit of $160 per contract.

* With DD trading at $49.64, a 1,000-share position would cost us $49,640.

* Instead, if we buy 10 of the DD July 50 Calls (DDGJ) for $2 ($2 each times 100 shares = $200 per contract), or $2,000 and ...

* Against that purchase, we sell 10 of the DD July 55 Calls (DDGK) for 40 cents (40 cents each times 100 shares = $40 per contract), or $400.

* Thus, on a 10-contract spread we have only $1,600 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.60 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 $160 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 $1.60 for this spread trade through Wednesday, April 20, as long as DD shares trade for $49.25 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 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 DD shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $51.60 level. Likewise, while the stock is under $51.60, 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, $1.60.

Breakeven: $51.60

The breakeven is $51.60 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.60 in this case) to the strike price of the call you are buying. Again, because we paid $2 for the DD July 50 Calls and took in 40 cents for the sale of the DD July 55 Calls, our net out-of-pocket is $1.60. You add that net to the strike price we’ve purchased ($50) and you get your breakeven of $51.60.

Max Profit: $340 per spread ($3.40 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 ($55 – $50 = $5) and subtracting the amount we paid for the spread ($1.60) and is therefore $3.40. Thus, if DD is $55 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.60 for the spread, that would leave us with a $3.40 profit, or 212%. On a 10-contract spread, that would translate to a profit of $3,400!

*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 the elimination of that minimum.

If you wanted to simulate a 1,000-share position in DuPont, you’d buy 10 of the DD July 50 Calls and sell 10 of the DD July 55 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 -- APRIL EXPIRATIONS

This week brings the expiration of three of our bull-call spreads, and though we are annoyed (to put it mildly) that these trades didn't become profitable, it is a testament to the benefits of options spread trading vs. stock investing.

Unfortunately, as you well know, our bull-call spreads lost all of their value for this expiration period. However, while stock-buyers are out tens of thousands of dollars, we were able to limit our losses on our Advanced Micro Devices (AMD), Amylin Pharmaceuticals (AMLN) and Biogen Idec (BIIB) with option spread trades.

Two of these stocks were the victims of bad news that gave us virtually no chance to save any part of our investment.

AMD warned about weak flash memory sales just after we recommended the spread trade, and the shares were promptly whacked by 20%. With the stock price settling far below our level at entry, the damage was done and all we could do was hope for a miracle to revive the shares -- which essentially means we had to accept the loss and move on. If there was a sunny side for the trade, it was that the entry price for the spread was low.

Biogen Idec was sliced in half when it announced the suspension of sales of its Multiple Sclerosis drug Tysabri at the end of February when one of the patients on the therapy died and another developed a fatal disease. About 5,000 patients had received the drug since its approval in November, but all it takes is one problem in the medical arena, and biotechs like Biogen will pay the price. And, just as options can ramp up the gains, they are hit doubly hard when a stock falls, so we didn't stand a chance after that news hit.

As far as the Amylin Pharma trade goes, the stock never cooperated, and it followed the general downtrend in the markets. Last month the company received approval for Symlin -- its injectable diabetes drug that will complement the use of insulin in patients with two major types of the disease. Analysts are predicting that annual sales of the drug, which is slated to go on sale in the early summer, will reach $200 million. I just wish it had gone on sale sooner so that we could benefit from this development, because the stock is now turning up.