Sponsored By:
| Dow | 10,465.94 | -1.22 |
| NASDAQ | 2,254.70 | 3.01 |
| S&P | 1,101.60 | 0.07 |
- Events & Appearances
- Special Reports
- Getting Started
- FAQ
- Modify Your Account
- Glossary
- Renew Subscription
- About the Adviser
August 1, 2010
- Subscriptions:
7/27/05
ATTACKING TERROR
July 27, 2005
I happened to be in New York City on Thursday and Friday, just as the attempted terror bombings in London hit the news tape. My first reaction was anger, and then my thoughts turned to concern for those injured -- I didn't particularly worry about the stock market.
I suspect most of you had similar reactions, but maybe in the backs of our minds, we did wonder -- just as we had two weeks earlier -- whether these attacks would hammer the market. I emphasize that I wondered, not that I was concerned.
Why the distinction? Because, as demonstrated on July 7, the terrorists showed that if they ran extremely well-coordinated attacks and everything went according to plan, they could disrupt travel and spread fear … but not change the way we live.
Sure, we will have to endure more security -- I did when I ventured into the NYC subway in NYC and, for the first time in my experience, there were armed guards checking bags and backpacks.
However, the reason our markets have been able to shrug off the attacks from these murderous thugs is that the best they can do to us isn't half-good enough. It wasn't enough to stop us from going to work; not enough to stop us from making, buying and selling semiconductor chips; not enough to stop us from riding the subway and, most importantly, not enough to cause us to stop enjoying our lives.
As I discussed this with friends at the Fox News Channel and with traders across the country, I came up with another reason we haven't panicked: odds.
Each year, 90 to 100 Americans are killed by lightning. If we round that to 95 and divide those lightning deaths per year into our population of roughly 280 million, we end up with the odds of about 3 million-to-1. I can't remember the last time I worried about being struck by lightning, and neither should you!
Here are a couple other odds for you to chew on: According to the National Safety Council, which used U.S. Census Bureau data to make its estimates, our odds of being killed in a streetcar are 1-in-18 million. The odds of being killed on a five-mile bus trip are 500 million-to-1. And according to NASA, the chance of an Earth-impacting asteroid occurring is once every thousand centuries.
But here's my personal favorite: Chance of an American home having at least one container of ice cream in the freezer: 9-in-10. So, I'm not going to let some terrorists ruin my life, but I am going to have a bowl of rocky road after dinner tonight. Take that, you terrorists!
CATCHING THE CHANGEWAVE -- NO QUALMS ABOUT ADDING QUALCOMM
Qualcomm (QCOM), the king of code division multiple access (CDMA) technology, had great quarterly numbers last week and moved up from $37.50 before earnings to $39 after the announcement.
Big whoop, right? Meanwhile, Broadcom (which we just closed out on Friday for an 88% profit) and Texas Instruments made huge moves. So what am I saying? Qualcomm has lots of room to move, and therefore, it's at a great entry point for us to make it into another winning trade.
SG Cowen said last week that, at the lower end of its historical range, the company views Qualcomm as attractive. It forecasts the company's returns accelerating into 2006 with an enterprise value/free cash flow of 19 times.
SG Cowen also projects that shares could have 20% to 30% upside relative to the market throughout the next 12 months. A 20% to 30% move would have had me taking profits, but absent such a reaction, I see great upside from here!
So I was already planning to jump on Qualcomm when just this morning I heard Distant Thunder start clicking like Toby Smith's right knee! DT showed fast money flowing into the QCOM Sept 42.50 Calls, where 10,376 traded by mid-session -- and that's against an open interest of just 1,077.
Ladies and gents, 98% of these calls were purchased on the offer in large blocks, so this -- on top of the BLOWOUT numbers from Broadcom and Texas Instruments -- tells me that there's some good news heading our way in Qualcomm, too.
To generate some good news of our own, I recommend buying the QCOM Oct 40 Calls (AAOJH) and selling a like number of QCOM Oct 45 Calls (AAOJI) for a net debit of $1.55.
Prices that work for do-it-yourselfers are paying $1.80 for the Oct 40 Calls and selling the Oct 45 Calls for 25 cents. Thus, we'd have paid $1.55 for a $5 bull-call spread and would then have $3.45 profit potential if QCOM is $45 or higher on the third Friday in October.
To make a limited-risk investment in Qualcomm, I recommend buying the QCOM Oct 40-45 bull-call spread for a net debit of $1.55.
TRADE DETAILS
All information is based on prices as of 3:15 p.m. Eastern on Wednesday, July 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 $1.55 for the QCOM Oct 40-45 bull-call spread through Wednesday, Aug. 3, as long as QCOM shares trade for $39.40 or higher.
Here is the information you need to know to buy our Qualcomm bull-call spread for profits:
Underlying Stock: Qualcomm (QCOM)
Current Stock Price: $40.15
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 | QCOM Oct 40 Call | $40 | AAOJH | -$1.80 | |
| Sell | 1 | QCOM Oct 45 Call | $45 | AAOJI | +$0.25 | |
| Net Cost | -$1.55 |
*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 $1.55, 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 $1.55, or $155 for each spread.
For those of you who are do-it-yourselfers and are making the trade online, an order to buy the QCOM Oct 40 Calls (AAOJH) for $1.80 while simultaneously selling the QCOM Oct 45 Calls (AAOJI) for 25 cents puts you in the trade with a net debit of $1.55.
Our loss is limited to the $1.55 that we are paying for the spread. If, on the other hand, Qualcomm rises above $45 on October expiration, then we make $3.45 on our $1.55 investment!
SUMMARY
With Qualcomm trading for $40.15, a 1,000-share position would tie up $40,150. However, with our trade you'll be able to put just $1,550 at risk and have a potential gain of $3,450 if QCOM rises to $45 or higher.
Here's why:
* Our net investment on that bull-call spread is the difference between what we paid for the QCOM Oct 40 Calls ($1.80) and our credit on the QCOM Oct 45 Calls (25 cents), or a net debit of $155 per contract.
* With QCOM trading at $40.15, a 1,000-share position would cost us $40,150.
* Instead, if we buy 10 of the QCOM Oct 40 Calls (AAOJH) for $1.80 ($1.80 each times 100 shares = $180 per contract), or $1,800 and ...
* Against that purchase, we sell 10 of the QCOM Oct 45 Calls (AAOJI) for 25 cents (25 cents each times 100 shares = $25 per contract), or $250.
* Thus, on a 10-contract spread we have only $1,550 invested, so that's all we can lose!
* If you follow these guidelines, this means your broker can pay no more than $1.55 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 $155 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 $1.55 for this spread trade through Wednesday, Aug. 3, as long as QCOM shares trade for $39.40 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 QCOM shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $41.55 level. Likewise, while the stock is under $41.55, 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, $1.55.
Breakeven: $41.55
The breakeven is $41.55 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.55 in this case) to the strike price of the call you are buying. Again, because we paid $1.80 for the QCOM Oct 40 Calls and took in 25 cents for the sale of the QCOM Oct 45 Calls, our net out-of-pocket is $1.55. You add that net to the strike price we've purchased ($40) and you get your breakeven of $41.55.
Max Profit: $345 per spread ($3.45 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 ($45 – $40 = $5) and subtracting the amount we paid for the spread ($1.55) and is therefore $3.45. Thus, if QCOM is $45 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.55 for the spread, that would leave us with a $3.45 profit, or 122.5%. On a 10-contract spread, that would translate to a profit of $3,450!
*This analysis does NOT include the cost of commissions while executing your trades.
JOIN ME AND THE CHANGEWAVE TEAM IN TWO WEEKS AT THE WASHINGTON, D.C., MONEY SHOW
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., is just two weeks away, 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
