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4/6/05
A MOMENT OF SILENCE

April 06, 2005

Whether you're a Catholic or not, news of Pope John Paul II's passing last weekend was big. It was big news not just because of who he was but, moreover, because of what this amazing man accomplished in the church along with the immense impact he had on the secular world.

I was in the Fox News studios in New York on Friday to tape Terry Keenan's show "Cashin' In" and to do a live hit on the king of business news Neil Cavuto's show --when it became clear that the pontiff would be passing away shortly. Even with Vice President Dick Cheney in the studios, the tone in the studio switched from the usual high-energy Fox style to solemn and reverent. As I scanned the rest of the networks, they too had switched to a more somber, reflective intonation. The stock market kept right on trading, but with focus moving away from stocks and toward Pope John Paul's condition, the bears took over and sent the Dow down 160 points from its intraday high of 10,560 to near its 2005 closing low.

WHAT THE OPTIONS MARKETS ARE TELLING ME

Following the recent Elan Corp. (ELN) and Biogen Idec (BIIB) fiasco, biopharmaceutical stocks have been trading very nervously. Case in point is CV Therapeutics (CVTX) where volatility has spiked to over 134% in recent days. The spike in volatility isn't earnings-related, as they just reported Q4 results on March 18. So, the massive increase in the risk that premium traders are putting on CVTX options may be related to the priority review the FDA granted for one of CVTX's drugs. The due date for that six-month review is June 10, 2005.




CATCHING THE CHANGEWAVE -- FINDING HARMONY IN HARMONIC

At ChangeWave, our research shows that the company best-positioned to benefit from the increasing competition between cable and satellite TV operators is Harmonic (HLIT). Our ChangeWave Alliance data indicates that cable and satellite operators are aggressively increasing bandwidth capacity in order to launch additional high-definition television (HDTV) and local channels. Additionally, video-on-demand (VOD) and cable telephony are services that cable operators need to offer in an effort to differentiate themselves from the satellite operators. Telecom operators are also beginning to deploy video services through fiber and digital service lines.

While our ChangeWave research alone should be enough reason to pick Harmonic, Standard & Poor's just released a report that rates the company's portfolio of video compression offerings as best-in-class. S&P says Harmonic is well-positioned to offer bandwidth-enhancement products and services. I think the widespread proliferation of enhanced video such as HDTV has created massive demand for the company's video distribution and transport equipment.






Here's how we invest in this exciting future:

Let's buy the HLIT July 10 Calls (LOQGB) and sell a like number of HLIT July 12.50 Calls (LOQGV) for a net debit of 50 cents. That's right, we can own the upside of HLIT from $10 to $12.50 until July expiration for just 50 cents. A 1,000 share position in HLIT would set you back $9,410, but this 10-lot spread will cost just $500!

If we're wrong and HLIT slides, then our $500 is the entire amount of risk we've got on the table. But, a close of $12.50 or higher by July expiration makes our spread worth $2.50, less the 50cents we paid, for a total profit of $2 per spread, or $2,000 on a 10-lot spread.

To make a limited-risk investment in Harmonic, I recommend buying the HLIT July 10-12.50 bull-call spread for a net debit of 50 cents.

TRADE DETAILS
All information is based on prices as of 11:45 a.m. Eastern on Wednesday, April 6, 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 65 cents for the HLIT July 10-12.50 bull-call spread through Wednesday, April 13, as long as HLIT shares trade for $8.75 or higher.

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

Underlying Stock: Harmonic (HLIT)

Current Stock Price: $9.41

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	HLIT July 10 Call	$10	LOQGB	-$0.90
Sell	1	HLIT July 12.50 Call	$12.50	LOQGV	+$0.40
		Net Cost			-$0.50

*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 50 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 50 cents, or $50 for each spread. (For those of you who are do-it-yourselfers and making the trade online, an order to buy the HLIT July 10 Calls (LOQGB) for 90 cents while simultaneously selling the HLIT July 12.50 Calls (LOQGV) for 40 cents puts you in the trade with a net debit of 50 cents.)

Our loss is limited to the 50 cents that we are paying for the spread. If, on the other hand, Harmonic rises above $12.50 on July expiration, then we make $2 on our 50-cent investment!

SUMMARY

With Harmonic trading for $9.41, a 1,000-share position would tie up $9,410. However, with our trade you'll be able to put just $500 at risk and have a potential gain of $2,000 if Harmonic rises to $12.50 or higher.

Here’s why:

* Our net investment on that bull-call spread is the difference between what we paid for the HLIT July 10 Calls (90 cents) and our credit on the HLIT July 12.50 Calls (40 cents), or a net debit of $50 per contract.

* With HLIT trading at $9.41, a 1,000-share position would cost us $9,410.

* Instead, if we buy 10 of the HLIT July 10 Calls (LOQGB) for 90 cents (90 cents each times 100 shares = $90 per contract), or $900 and ...

* Against that purchase, we sell 10 of the HLIT July 12.50 Calls (LOQGV) for 40 cents (40 cents each times 100 shares = $40 per contract), or $400.

* Thus, on a 10-contract spread we have only $500 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than 50 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 $50 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 65 cents for this spread trade through Wednesday, April 13, as long as HLIT shares trade for $8.75 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 HLIT shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $10.50 level. Likewise, while the stock is under $10.50, 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, 50 cents.

Breakeven: $10.50

The breakeven is $10.50 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread (50 cents in this case) to the strike price of the call you are buying. Again, because we paid 90 cents for the HLIT July 10 Calls and took in 40 cents for the sale of the HLIT July 12.50 Calls, our net out-of-pocket is 50 cents. You add that net to the strike price we’ve purchased ($10) and you get your breakeven of $10.50.

Max Profit: $200 per spread ($2 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 ($12.50 – $10 = $2.50) and subtracting the amount we paid for the spread (50 cents) and is therefore $2. Thus, if HLIT is $12.50 or higher on expiration, the spread will achieve that $2.50 max and, since we paid 50 cents for the spread, that would leave us with a $2 profit, or 400%. On a 10-contract spread, that would translate to a profit of $2,000!

*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 Harmonic, you’d buy 10 of the HLIT July 10 Calls and sell 10 of the HLIT July 12.50 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.