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9/1/05
PICK YOUR POISON

September 01, 2005

"If it bleeds, it leads!"

This phrase has long been the staple of news organizations around the world. Print, radio and television news directors fighting for ratings and relevancy continually hit us between the eyes with reports of murder and mayhem. And this past week, they must have thought they hit the mother lode as Hurricane Katrina turned to head straight for the Big Easy.

As I prepared for my CBS radio show this Monday, I remarked to my co-host, Tom Haugh of PTI Securities, that the last time I saw so many ghouls was Halloween. While we joked about the media frenzy, report after report from New Orleans, Biloxi, Miss., and Mobile, Ala., detailed how much damage we could expect from this Category 5 hurricane as it was about to make landfall.

Reporters breathlessly spoke of 30-foot storm surges washing New Orleans off the map, debated how few structures could withstand 160 mph winds and pondered the fact that approximately 1 million people could be left homeless. Listening to them would make anyone want to slit their wrists.

Fortunately, I suspect most of us understand that sound bites like these are not meant to inform as much as titillate, and unfortunately, we oftentimes react accordingly.

As Katrina missed a direct hit on New Orleans and most of the refineries in Hurricane Alley, crude oil fell from the overnight high of $70.80 a barrel to finish at $67.20 and the stock market followed oil's lead. Katrina was big and bad and did billions in damage -- including disrupting oil rigs and refineries, natural gas, cotton, seafood and shipping in one of our biggest ports. The effects will be felt by all of us for months to come.

Since 1946, the average deficit has been 1.6%, and the worst deficit -- in 1983, during the recession when Ronald Reagan and Paul Volcker were wringing inflation out of the economy -- was 6%.

WHAT THE OPTIONS MARKETS ARE TELLING ME

Futures for unleaded gasoline traded at $1.92 a gallon on Friday (Aug. 26) ahead of Katrina's impact on the Gulf Coast. Yesterday (Aug. 31), in a panic that I haven't seen since Qualcomm (QCOM) or Yahoo! (YHOO) in 1999, unleaded gasoline traded at $2.92! It came down quickly after that ludicrous level, though, finishing with a gain of just 3%.

When I saw unleaded gasoline prices start to move on Tuesday, I admit that I immediately filled up for $2.81 a gallon because I knew the stuff was hitting the fan, and waiting a day would cost me dearly. Indeed, the same BP Amoco station posted $3.39 for a gallon yesterday morning!

I know stories like this are not unique to Chicago, but they do show how fast a panic can grip the public. There is no good news about Katrina, but it has justified our faith in two of our current recommendations -- FuelCell (FCEL) and Edge Petroleum (EPEX) -- and we're being rewarded in both!

CATCHING THE CHANGEWAVE -- MICRON TECHNOLOGY IS 'CALL'ING OUT TO US

If you wanted a tech stock that is rocking and rolling like an oil stock, take a look at Micron Technology (MU), where yesterday (Aug. 31) Distant Thunder (our proprietary option-tracking program) showed 15,615 of the Sept 12 Calls changing hands, and more than 98% of that volume was from people buying on the offer.

This is very serious buying, as nearly four times the open interest turning over always catches my interest. Short-term option-buying tells me that the buyers expect a move in the short term, so these aren't investors but, rather, they are fast-money players!






Even though the buying was in the short-term options of this company, which makes semiconductor memory devices, I think its more prudent to buy a longer-dated call spread and, thus, I recommend buying the MU Jan 12.50 Calls (MUAV) and selling a like number of the MU Jan 15 Calls (MUAC) for a net debit of 60 cents.

Prices that work right now are paying 80 cents for the Jan 12.50 Calls and selling the Jan 15 Calls for 20 cents. As this is a $2.50 bull-call spread, our profit potential is $1.90 ($2.50 - 60 cents = $1.90), which would be a better than 216% return!

As always, our risk is limited to the amount we pay for this spread, or 60 cents. A 10-lot trader would pony up $600 with a profit potential of $1,900.

To make a limited-risk investment in Micron Technology, I recommend buying the MU Jan 12.50-15 bull-call spread for a net debit of 60 cents.

TRADE DETAILS
All information is based on prices as of 12:45 p.m. Eastern on Thursday, Sept. 1, 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 60 cents for the MU Jan 12.50-15 bull-call spread through Wednesday, Sept. 7, as long as MU shares trade for $11.50 or higher.

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

Underlying Stock: Micron Technology (MU)

Current Stock Price: $11.76

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	MU Jan 12.50 Call	$12.50	MUAV	-$0.80
Sell	1	MU Jan 15 Call	$15	MUAC	+$0.20
		Net Cost			-$0.60

*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 60 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 60 cents, or $60 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the MU Jan 12.50 Calls (MUAV) for 80 cents while simultaneously selling the MU Jan 15 Calls (MUAC) for 20 cents puts you in the trade with a net debit of 60 cents.

Our loss is limited to the 60 cents that we are paying for the spread. If, on the other hand, Micron Technology rises above $15 on January expiration, then we make $1.90 on our 60-cent investment!

SUMMARY

With Micron Technology trading for $11.76, a 1,000-share position would tie up $11,760. However, with our trade you'll be able to put just $600 at risk and have a potential gain of $1,900 if MU rises to $15 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the MU Jan 12.50 Calls (80 cents) and our credit on the MU Jan 15 Calls (20 cents), or a net debit of $60 per contract.

* With MU trading at $11.76, a 1,000-share position would cost us $11,760.

* Instead, if we buy 10 of the MU Jan 12.50 Calls (MUAV) for 80 cents (80 cents each times 100 shares = $80 per contract), or $800 and ...

* Against that purchase, we sell 10 of the MU Jan 15 Calls (MUAC) for 20 cents (20 cents each times 100 shares = $20 per contract), or $200.

* Thus, on a 10-contract spread we have only $600 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than 60 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 $60 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 60 cents for this spread trade through Wednesday, Sept. 7, as long as MU shares trade for $11.50 or higher.

As with any 1-to-1 bull-call spread, our risk is limited to what we pay for the spread -- in this case, 60 cents.

Breakeven: $13.10

The breakeven is $13.10 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread (60 cents in this case) to the strike price of the call you are buying. Again, because we paid 80 cents for the MU Jan 12.50 Calls and took in 20 cents for the sale of the MU Jan 15 Calls, our net out-of-pocket is 60 cents. You add that net to the strike price we've purchased ($12.50) and you get your breakeven of $13.10.

Max Profit: $190 per spread ($1.90 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 ($15 – $12.50 = $2.50) and subtracting the amount we paid for the spread (60 cents) and is therefore $1.90. Thus, if Micron Technology is $15 or higher on expiration, then the spread will achieve that $2.50 max and, because we paid 60 cents for the spread, that would leave us with a $1.90 profit, or 216.67%. On a 10-contract spread, that would translate to a profit of $1,900!

*This analysis does NOT include the cost of commissions while executing your trades.