Sponsored By:
| Dow | 10,764.35 | 78.37 |
| NASDAQ | 2,397.64 | 19.63 |
| S&P | 1,149.99 | -0.25 |
- Events & Appearances
- Special Reports
- Getting Started
- FAQ
- Modify Your Account
- Glossary
- Renew Subscription
- About the Adviser
March 17, 2010
- Subscriptions:
9/14/05
LOOKING BACK
September 14, 2005
It's been four years since 9/11.
Like many of you, I lost friends in New York that day. And there are others among us who lost friends in Pennsylvania or at the Pentagon.
9/11 changed us a lot -- but despite the doomsayers, we're still here, commerce is booming and New York City is more than just back on its feet.
In fact, NYC will welcome more than 100 million inbound air travelers this year, which is a new record! Smith Travel Research found that the country's most expensive hotel market plummeted the week after the attack -- only about 55% of the city's rooms were filled, and that was at an average rate of $158 a night. Compare that with 92% occupancy at an average of $230 per night one year prior.
Never fear, though -- the Big Apple will be as big of an attraction to travelers from around the world as it used to be. In fact, the average price for a hotel room in Manhattan in July 2005 jumped to $212 a night, which was a 15% increase above the previous year.
At least those travelers were fortunate enough to find accommodations, as occupancy in the city's hotels rose to its current record -- 87% -- that month. And I don't doubt that those 100 million expected visitors will help the city to set yet another new record by this time next year.
CATCHING THE CHANGEWAVE -- A POSSIBLE KATRINA SHIPPING PLAY
Toby Smith has liked Frontline Ltd. (FRO) for quite a while and put it on his Ballast Income Buy List on Aug. 15. I haven't yet recommended jumping aboard, no pun intended, but the time has come to set sail on this oil tanker shipping play.
In fact, Frontline is one of the top shipping companies in the world in its particular space, which is ownership and operation of oil tankers, including oil/bulk/ore (OBO) carriers.
Frontline's Suezmax tankers are used for trading mainly in the Atlantic Basin, while its OBO carriers transport either oil or dry cargo. Headquartered in Hamilton, Bermuda, Frontline saw a dip from its 2004 record level of $100,000 per day for its ships, unfortunately. However, it is still able to charge $30,000-$50,000 a day, which makes Frontline the oil shipper with the highest profit margin in the biz, and there aren't a heck of a lot of other options for their specialty ships.
Additionally, I predict Katrina's impact will result in the reversal of the North Sea production cuts we saw in Q2. And if that plays out, Frontline will again get daily rates at the high end of the $30,000-$55,000 range!
Here's how we invest in Frontline with limited risk, but fantastic potential:
I recommend buying the FRO Feb 45 Calls (FROBI) and selling a like number of FRO Feb 50 Calls (FROBJ) for a net cost of $1.70. Prices with FRO trading at $43.63 were paying $3.30 for the Feb 45 Calls and selling the Feb 50 Calls for $1.60.
As always, that $1.70 debit is our total risk. Our breakeven is achieved at $46.70, which is taken by adding our debit of $1.70 to our long strike ($45). When FRO is $50 or higher on February expiration, this $5 spread hits its max of $5 and since we paid $1.70 for it, we make $3.30, or 194%.
To make a limited-risk investment in Frontline Ltd., I recommend buying the FRO Feb 45-50 bull-call spread for a net debit of $1.70.
TRADE DETAILS
All information is based on prices as of 12:15 p.m. Eastern on Wednesday, Sept. 14, 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 $1.70 for the FRO Feb 45-50 bull-call spread through Wednesday, Sept. 21, as long as FRO shares trade for $43.25 or higher.
Here is the information you need to know to buy our Frontline Ltd. bull-call spread for profits:
Underlying Stock: Frontline Ltd. (FRO)
Current Stock Price: $43.73
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 | FRO Feb 45 Call | $45 | FROBI | -$3.30 | |
| Sell | 1 | FRO Feb 50 Call | $50 | FROBJ | +$1.60 | |
| Net Cost | -$1.70 |
*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 $1.70, 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 $1.70, or $170 for each spread.
For those of you who are do-it-yourselfers and are making the trade online, an order to buy the FRO Feb 45 Calls (FROBI) for $3.30 while simultaneously selling the FRO Feb 50 Calls (FROBJ) for $1.60 puts you in the trade with a net debit of $1.70.
Our loss is limited to the $1.70 that we are paying for the spread. If, on the other hand, Frontline Ltd. rises above $50 on or before February expiration, then we make $3.30 on our $1.70 investment!
SUMMARY
With Frontline Ltd. trading for $43.73, a 1,000-share position would tie up $43,730. However, with our trade you'll be able to put just $1,700 at risk and have a potential gain of $3,500 if FRO rises to $50 or higher.
Here's why:
* Our net investment on that bull-call spread is the difference between what we paid for the FRO Feb 45 Calls ($3.30) and our credit on the FRO Feb 50 Calls ($1.60), or a net debit of $170 per contract.
* With FRO trading at $43.73, a 1,000-share position would cost us $43,730.
* Instead, if we buy 10 of the FRO Feb 45 Calls (FROBI) for $3.30 ($3.30 each times 100 shares = $330 per contract), or $3,300 and ...
* Against that purchase, we sell 10 of the FRO Feb 50 Calls (FROBJ) for $1.60 ($1.60 each times 100 shares = $160 per contract), or $1,600.
* Thus, on a 10-contract spread we have only $1,700 invested, so that's all we can lose!
* If you follow these guidelines, this means your broker can pay no more than $1.70 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 $170 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 $1.70 for this spread trade through Wednesday, Sept. 21, as long as FRO shares trade for $43.25 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 FRO shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $46.70 level. Likewise, while the stock is under $46.70, 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, $1.70.
Breakeven: $46.70
The breakeven is $46.70 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($1.70 in this case) to the strike price of the call you are buying. Again, because we paid $3.30 for the FRO Feb 45 Calls and took in $1.60 for the sale of the FRO Feb 50 Calls, our net out-of-pocket is $1.70. You add that net to the strike price we've purchased ($45) and you get your breakeven of $46.70.
Max Profit: $330 per spread ($3.30 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 ($50 – $45 = $5) and subtracting the amount we paid for the spread ($1.70) and is therefore $3.30. Thus, if Frontline Ltd. is $50 or higher on expiration, then the spread will achieve that $5 max and, because we paid $1.70 for the spread, that would leave us with a $3.30 profit, or 194%. On a 10-contract spread, that would translate to a profit of $3,300!
*This analysis does NOT include the cost of commissions while executing your trades.
BE MY GUEST AT THE MONEY SHOW IN SAN FRANCISCO
Join me Oct. 14-16, 2005, at the San Francisco Marriott for an exciting and informative Money Show.
Click below for FREE admission for you and a companion:
www.sanfranciscomoneyshow.com/changewave
Or, call 800-970-4355 and mention priority code 004074.
The ChangeWave gang will be on hand, including Tobin Smith, Michael Shulman, Bryan Perry and myself to talk stocks with you throughout the show.
Our mission is to help you grow your wealth.
In today's market, it's hard to tell the difference between the winners and losers. So we're ready to assist you in clearing away the fog and figuring out which companies are ripe for solid profits and would be good additions to your portfolio.
In my seminar, "How Insider Action Can Help Make You Rich," I'll show you how you can use options to leverage your money for profits and wealth-building. A few of the other ChangeWave seminars include "Top 5 Wealth Waves 2006" and "Retire on Double-Digit Income."
Don't miss this opportunity to hear the ChangeWave crew and get information that will help you become more skillful, knowledgeable and profitable in your trading.
Check out the ChangeWave adviser schedule below:
SATURDAY, OCT. 15, 2005
SUNDAY, OCT. 16, 2005
While at the show, I also encourage you to visit us in the Phillips InvestorPlace booth.
The San Francisco Money Show 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.sanfranciscomoneyshow.com/changewave
I look forward to seeing you there.
