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7/13/05
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July 13, 2005
The former Reliant Energy is testing a system to bring high-speed Internet access to customers through the most universal and convenient access in our homes: the electric wall socket!
Toby Smith has often talked about running broadband over power lines (BPL), and now CenterPoint Energy, the company that owns the power lines throughout Houston, is running a pilot of the system that will offer Internet access at more than 1.5 times the speed of cable modems.
BPL works by sending data via radio waves over power lines. The signal can then either be turned into a wireless data stream that's beamed from a power pole outside a customer's home to a wireless router, or it can continue into the house to a modem that plugs into an electrical outlet and, thus, makes the concept of an instantly networked home a very real possibility.
Additionally, BPL technology has the potential to allow any piece of equipment with a power plug to communicate with any other such piece of equipment. Your fridge could tell you when you're out of milk. A soda machine could tell when it's out of a certain brand. Anything that plugs into an electric outlet is fair game.
WHAT THE OPTIONS MARKETS ARE TELLING ME
I was quoted by Reuters this week on the action with Washington Mutual, when I noted that the trading floor buzz has HSBC Holdings interested in acquiring WaMu -- the country's largest savings and loan company. On Monday, trading in WaMu's call options was five times higher than its normal average of 4,642 contracts, which indicates that investors are optimistic about the stock and are expecting price moves in the next six weeks to around $44 to $48 in Washington Mutual.
Since then, I wanted to add that I'm seeing significant buying of at- or out-the-money calls in UBS and, just today, (Wednesday, July 13) in JP Morgan Chase. The action in both UBS and JP Morgan Chase is most likely a pending upgrade -- or guidance and earnings -- as both are too big to be takeover candidates.
CATCHING THE CHANGEWAVE -- 'CLEANING UP' WITH FUELCELL
Three weeks ago, a $14 billion energy bill came out of the Senate. Big deal -- look at our energy policy, or the lack thereof. Nuclear energy, solar energy and/or hybrids have lacked serious support for decades.
However, this bill seems to be different. Beneficiaries do look to include all of the aforementioned sectors as well as fuel cells and clean coal. Thus, this week we are adding our second alternative-energy options spread of 2005: FuelCell Energy (FCEL).
Toby calls FuelCell (and other companies in this overall area) the "CleanTech ChangeWave." Write that down, because when the talking heads begin tossing this about, you'll know where you heard the term first!
We've estimated that tax credits for fuel cells could total $18 billion. Even if that number gets reduced by 40%, it's still a very big carrot -- and that's what it will take to get businesses and consumers to take CleanTech seriously.
In fact, just this week, FuelCell and Enbridge (ENB) entered into a development and distribution agreement for a new "ultra-clean" hybrid power plant, and I think this is just the beginning!
Now, when I say fuel cells, I'm sure many of you will think of cars, but the auto industry is just the tip of the iceberg. The real payoff will be in power generation. FuelCell Energy's Direct FuelCell power plants generate electricity without combustion. Unlike other fuel cell technologies, Direct FuelCells can use hydrocarbon fuels without the need to first create hydrogen in an external fuel processor.
These products are the most efficient fossil fuel generators in this size range -- without the combustion and pollutants associated with burning fuels. Natural gas, waste gas and other methane sources are turned into hydrogen without resulting in fossil fuel pollution.
Here's how we invest in the fabulous potential of FuelCell: Tell your broker to buy the FCEL Oct 10 Calls (FQGJB) and sell a like number of FCEL Oct 12.50 Calls (FQGJS) for a net debit of 95 cents. As of Wednesday, July 13, we were paying $1.35 for the Oct 10 Calls and selling the Oct 12.50 Calls for 40 cents.
With FCEL trading for $10.57, this bull-call spread has intrinsic (in-the-money) value of 57 cents, so we're paying just 38 cents of extrinsic premium to control the upside from $10 to $12.50 for FCEL.
As always, the debit of 95 cents is our entire risk. If FCEL is $12.50 or higher on October expiration, this spread expands to its full value of $2.50, which means a profit of $1.55 to us!
To make a limited-risk investment in FuelCell Energy, I recommend buying the FCEL Oct 10-12.50 bull-call spread for a net debit of 95 cents.
TRADE DETAILS
All information is based on prices as of 11:30 a.m. Eastern on Wednesday, July 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 for the FCEL Oct 10-12.50 bull-call spread through Wednesday, July 20, as long as FCEL shares trade for $10 or higher.
Here is the information you need to know to buy our FuelCell Energy bull-call spread for profits:
Underlying Stock: FuelCell Energy (FCEL)
Current Stock Price: $10.57
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 | FCEL Oct 10 Call | $10 | FQGJB | -$1.35 | |
| Sell | 1 | FCEL Oct 12.50 Call | $12.50 | FQGJS | +$0.40 | |
| Net Cost | -$0.95 |
*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 95 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 95 cents, or $95 for each spread.
For those of you who are do-it-yourselfers and are making the trade online, an order to buy the FCEL Oct 10 Calls (FQGJB) for $1.35 while simultaneously selling the FCEL Oct 12.50 Calls (FQGJS) for 40 cents puts you in the trade with a net debit of 95 cents.
Our loss is limited to the 95 cents that we are paying for the spread. If, on the other hand, FuelCell Energy rises above $12.50 on October expiration, then we make $1.55 on our 95-cent investment!
SUMMARY
With FuelCell Energy trading for $10.57, a 1,000-share position would tie up $10,570. However, with our trade you'll be able to put just $950 at risk and have a potential gain of $1,550 if FuelCell Energy 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 FCEL Oct 10 Calls ($1.35) and our credit on the FCEL Oct 12.50 Calls (40 cents), or a net debit of $95 per contract.
* With FCEL trading at $10.57, a 1,000-share position would cost us $10,570.
* Instead, if we buy 10 of the FCEL Oct 10 Calls (FQGJB) for $1.35 ($1.35 each times 100 shares = $135 per contract), or $1,350 and ...
* Against that purchase, we sell 10 of the FCEL Oct 12.50 Calls (FQGJS) for 40 cents (40 cents each times 100 shares = $40 per contract), or $400.
* Thus, on a 10-contract spread we have only $950 invested, so that's all we can lose!
* If you follow these guidelines, this means your broker can pay no more than 95 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 $95 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 for this spread trade through Wednesday, July 20, as long as FCEL shares trade for $10 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 FCEL shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $10.95 level. Likewise, while the stock is under $10.95, 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, 95 cents.
Breakeven: $10.95
The breakeven is $10.95 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread (95 cents in this case) to the strike price of the call you are buying. Again, because we paid $1.35 for the FCEL Oct 10 Calls and took in 40 cents for the sale of the FCEL Oct 12.50 Calls, our net out-of-pocket is 95 cents. You add that net to the strike price we’ve purchased ($10) and you get your breakeven of $10.95.
Max Profit: $155 per spread ($1.55 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 (95 cents) and is therefore $1.55. Thus, if FCEL is $12.50 or higher on expiration, then the spread will achieve that $2.50 max and, because we paid 95 cents for the spread, that would leave us with a $1.55 profit, or 163%. On a 10-contract spread, that would translate to a profit of $1,550!
*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:
www.dcmoneyshow.com/ms/dcms/main.asp?scode=004074
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:
www.dcmoneyshow.com/ms/dcms/main.asp?scode=004074
