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4/27/05
HARBINGERS OF THINGS TO COME?

April 27, 2005

We barely escaped a horrific first quarter of 2005, and we're already getting news from IBM and Amazon.com that shows we're not out of the woods yet. The surprise release of IBM's earnings on April 14 set in motion a 191.24-point decline for the Dow Jones and a 38.56-point collapse of the Nasdaq. Big Blue sank $6.94 (8.3%), to $76.70, the day after the company announced disappointing Q1 results. And then last night (April 26), online retailer Amazon.com announced that its first-quarter earnings fell 30% -- even as revenue jumped 24%.

The bears had to be licking their chops as these two leaders of their respective sectors got their heads handed to them. However, for some strange reason -- despite that news, despite gas prices up 50 cents a gallon in the past year and despite seven-straight quarter-percentage-point increases in the Fed funds rate -- the Dow is still holding 10,000 and the Nasdaq is likewise holding 1,900.

Why does the fact that these two indices have failed to breakdown mean anything to me? Well, for one, I've always held that the best times to buy are either ahead of good news or when blood is in the streets, and clearly some of what we've seen recently and what I've described above are hallmarks of the latter. Although I'm heartened by Intel's, General Electric's and Texas Instruments' outlooks and earnings, time will tell whether the canaries that died in the IBM or Amazon mines were isolated incidents or whether they were harbingers of things to come.

CATCHING THE CHANGEWAVE -- THE IPOD OF THE AUTOMOTIVE INDUSTRY

Every business day, I do a morning radio program for CBS, and not a week goes by that I don't get a call about how to invest in hybrid cars. This question is among the most frequent investment queries, and for good reason -- hybrids are the iPods of the automotive industry!

Since 2000, sales of electric and alternative-powered vehicles are up 960%. New hybrid registrations totaled 83,153 last year, an 81% increase over the year before, according to data released by R.L. Polk & Co. And when you consider that this figure represents less than 1% of the 17 million new vehicles sold in 2004, you can see that this is an industry in its infancy -- and with enormous upside.

Our ChangeWave Alliance isn't late to the party, as they've repeatedly shown that the hybrid wave will be much bigger than other Wall Street predictions, and the big dog in hybrids, Toyota, buys its rechargeable batteries that license their high-powered systems from Energy Conversion Devices (ENER). I like ENER not only because of the Toyota hybrids, but also because they've got thin-film solar cell (photovoltaic) products and real revenue, as demonstrated by their recent earnings report, which showed that in the six months ended December 2004, revenues totaled $117.9 million, up from $29.9 million!






Here's how we play: I recommend buying the ENER Sept 22.50 Calls (EQIIX) and selling a like number of the ENER Sept 25 Calls (EQIIE) for a net debit of $1.20. With ENER trading at $23.66, that spread has an intrinsic (in-the-money) value of $1.16. As always, if ENER is below our long strike (22.50) in September, we could lose our entire investment of $1.20. However, if ENER continues a bullish trading pattern and rises above $25, this spread more than doubles in value to $2.50, a profit of $1.30 per contract.

To make a limited-risk investment in Energy Conversion Devices, I recommend buying the ENER Sept 22.50-25 bull-call spread for a net debit of $1.20.

TRADE DETAILS
All information is based on prices as of 11:30 a.m. Eastern on Wednesday, April 27, 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 $1.20 for the ENER Sept 22.50-25 bull-call spread through Wednesday, May 4, as long as ENER shares trade for $22.75 or higher.

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

Underlying Stock: Energy Conversion Devices (ENER)

Current Stock Price: $23.66

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	ENER Sept 22.50 Call	$22.50	EQIIX	-$3.60
Sell	1	ENER Sept 25 Call	$25	EQIIE	+$2.40
		Net Cost			-$1.20

*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 $1.20, 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 $1.20, or $120 for each spread. (For those of you who are do-it-yourselfers and making the trade online, an order to buy the ENER Sept 22.50 Calls (EQIIX) for $3.60 while simultaneously selling the ENER Sept 25 Calls (EQIIE) for $2.40 puts you in the trade with a net debit of $1.20.)

Our loss is limited to the $1.20 that we are paying for the spread. If, on the other hand, Energy Conversion Devices rises above $25 on September expiration, then we make $1.30 on our $1.20 investment!

SUMMARY

With Energy Conversion Devices trading for $23.66, a 1,000-share position would tie up $23,660. However, with our trade you'll be able to put just $1,200 at risk and have a potential gain of $1,300 if Energy Conversion Devices rises to $25 or higher.

Here’s why:

* Our net investment on that bull-call spread is the difference between what we paid for the ENER Sept 22.50 Calls ($3.60) and our credit on the ENER Sept 25 Calls ($2.40), or a net debit of $120 per contract.

* With ENER trading at $23.66, a 1,000-share position would cost us $23,660.

* Instead, if we buy 10 of the ENER Sept 22.50 Calls (EQIIX) for $3.60 ($3.60 each times 100 shares = $360 per contract), or $3,600 and ...

* Against that purchase, we sell 10 of the ENER Sept 25 Calls (EQIIE) for $2.40 ($2.40 each times 100 shares = $240 per contract), or $2,400.

* Thus, on a 10-contract spread we have only $1,200 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $1.20 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 $120 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 $1.20 for this spread trade through Wednesday, May 4, as long as ENER 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 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 ENER shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $23.70 level. Likewise, while the stock is under $23.70, 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, $1.20.

Breakeven: $23.70

The breakeven is $23.70 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.20 in this case) to the strike price of the call you are buying. Again, because we paid $3.60 for the ENER Sept 22.50 Calls and took in $2.40 for the sale of the ENER Sept 25 Calls, our net out-of-pocket is $1.20. You add that net to the strike price we’ve purchased ($22.50) and you get your breakeven of $23.70.

Max Profit: $130 per spread ($1.30 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 ($25 – $22.50 = $2.50) and subtracting the amount we paid for the spread ($1.20) and is therefore $1.30. Thus, if ENER is $25 or higher on expiration, then the spread will achieve that $2.50 max and, because we paid $1.20 for the spread, that would leave us with a $1.30 profit, or 108.33%. On a 10-contract spread, that would translate to a profit of $1,300!

*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 Energy Conversion Devices, you’d buy 10 of the ENER Sept 22.50 Calls and sell 10 of the ENER Sept 25 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.