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6/29/05
MODERN-DAY PIRATES
June 29, 2005
I was watching what is frequently referred to as "this august body" (also known as the U.S. Senate) -- and the testimony of both Treasury Secretary John Snow and Federal Reserve Chairman Alan Greenspan --- and just shaking my head.
The senators were on Snow and Greenspan like flies on a rib roast over CNOOC's $20 billion, all-cash bid for Unocal as well as Haier's $1.3 billion deal for Maytag. As usual, though, the senators' focus was on getting a sound bite onto C-SPAN rather than actually doing anything about the problem.
Don't get me wrong -- I think CNOOC's takeover bid for Unocal should inspire debate for a host of reasons, but dumping on the Fed chairman and Treasury secretary isn't solving anything.
Maybe our legislative branch should address intellectual property piracy, which China has done virtually nothing to curb. If they aren't playing ball, then maybe these same senators could use this week's Supreme Court ruling to hit China and Chinese companies where it hurts.
One out of every three music discs sold in the world last year was pirated, with fake recordings outselling legal ones in 31 countries. If you're looking to raise some money from folks other than mutual fund operators and brokerages, might I suggest getting a piece of the $4.6 billion in pirated recordings as a good place to start.
But let's not just hit China. What about Brazil, India, Indonesia, Mexico, Pakistan, Paraguay, Russia and Ukraine? Our intellectual property -- whether it's from Microsoft or MCI -- is important and certainly a jewel worth protecting. The copyright industries account for 5% of gross domestic product in the U.S. and Europe. Piracy jeopardizes jobs, economic growth and innovation, and it saps tax revenue.
In short, it's OK to be concerned about what China might or might not do with Unocal or Maytag, but let's not let them off the hook for thieving intellectual property -- or at least let's not turn a blind eye to it.
CATCHING THE CHANGEWAVE -- ON THE MOVE
When the market gives me lemons, I look to open a lemonade stand. Such is the case with FedEx (FDX), which was a catalyst for the panic-selling we witnessed at the tail end of last week. That was when the package delivery giant reported earnings that missed and warned about crude oil costs impacting future earnings.
The sell-off in FDX shares took them from $88.12 to just below $80, and I feel great about buying into this category killer at such a discount!
I mean, where else can you find a company with revenues up 18.8% (to $29.4 billion), and net income up 73% (to $1.5 billion)? Sure, crude will be something that FedEx and its competitors have to deal with, but they've been able to pass along increases in the past and will do so again.
Also, with the new reading on GDP -- coming in at an improved 3.8% (matching Q1 2004) -- I think the glass is more than half-full. Further, I believe the April through June quarter and subsequent July through October segments should reflect similar positive metrics, and FedEx will ride that wave.
The 52-week range for FedEx is $76.25 to $101.87 -- thus, we are investing in this Fortune 100 company within 8% of the low, which I think puts the odds in our favor, and that's always the focus here at ChangeWave Options Investor.
Here's how we play this with limited risk:
Tell your broker to buy the FDX Oct 85 Calls (FDXJQ) and sell a like number of FDX Oct 90 Calls (FDXJR) for a net debit of $1.60. Prices that worked at midday were paying $2.90 for the Oct 85 Calls and selling the Oct 90 Calls for $1.30.
Paying $1.60 for a $5 bull-call spread means we have $3.40 in profit potential if FDX is $90 or higher by October expiration. That's more than 200% on our money, and our limited-risk options spread means we don't have to watch every tick of crude oil.
To make a limited-risk investment in FedEx, I recommend buying the FDX Oct 85-90 bull-call spread for a net debit of $1.60.
TRADE DETAILS
All information is based on prices as of 11 a.m. Eastern on Wednesday, June 29, 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 FDX Oct 85-90 bull-call spread through Wednesday, July 6, as long as FDX shares trade for $81.75 or higher.
Here is the information you need to know to buy our FedEx bull-call spread for profits:
Underlying Stock: FedEx (FDX)
Current Stock Price: $82.89
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 | FDX Oct 85 Call | $85 | FDXJQ | -$2.90 | |
| Sell | 1 | FDX Oct 90 Call | $90 | FDXJR | +$1.30 | |
| 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 are making the trade online, an order to buy the FDX Oct 85 Calls (FDXJQ) for $2.90 while simultaneously selling the FDX Oct 90 Calls (FDXJR) for $1.30 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, FedEx rises above $90 on October expiration, then we make $3.40 on our $1.60 investment!
SUMMARY
With FedEx trading for $82.89, a 1,000-share position would tie up $82,890. However, with our trade you'll be able to put just $1,600 at risk and have a potential gain of $3,400 if FedEx rises to $90 or higher.
Here’s why:
* Our net investment on that bull-call spread is the difference between what we paid for the FDX Oct 85 Calls ($2.90) and our credit on the FDX Oct 90 Calls ($1.30), or a net debit of $160 per contract.
* With FDX trading at $82.89, a 1,000-share position would cost us $82,890.
* Instead, if we buy 10 of the FDX Oct 85 Calls (FDXJQ) for $2.90 ($2.90 each times 100 shares = $290 per contract), or $2,900 and ...
* Against that purchase, we sell 10 of the FDX Oct 90 Calls (FDXJR) for $1.30 ($1.30 each times 100 shares = $130 per contract), or $1,300.
* 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, July 6, as long as FDX shares trade for $81.75 or higher.
TRADE PROFITABILITY ANALYSIS
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 FDX shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $86.60 level. Likewise, while the stock is under $86.60, 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: $86.60
The breakeven is $86.60 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 $2.90 for the FDX Oct 85 Calls and took in $1.30 for the sale of the FDX Oct 90 Calls, our net out-of-pocket is $1.60. You add that net to the strike price we’ve purchased ($85) and you get your breakeven of $86.60.
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 ($90 – $85 = $5) and subtracting the amount we paid for the spread ($1.60) and is therefore $3.40. Thus, if FDX is $90 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 212.5%. 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.
JOIN ME AND THE CHANGEWAVE TEAM IN THE NATION'S CAPITAL, WASHINGTON, D.C.
I want you to be my guest at The Money Show in Washington, D.C., on Aug. 11-13, 2005, at the Wardman Park Marriott in Washington, D.C.
Plus, you and your companion are entitled to FREE admission when you click below:
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Or, call 800-970-4355 and mention priority code 004074.
The ChangeWave gang will be on hand, including Toby Smith and Bryan Perry, and we will talk about stocks and trading with you throughout the show.
Here is the ChangeWave adviser schedule:
THURSDAY, AUG. 11, 2005
FRIDAY, AUG. 12, 2005
SATURDAY, AUG. 13, 2005
The Money Show in Washington, D.C., WILL book up quickly, so call 800-970-4355 now and don’t forget to mention priority code 004074.
Or visit the Web page below to make your reservations online today:
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