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'Good Will Hunting' Did It!

January 11, 2006

Dear Fellow Options Investor,

Anyone who saw "Good Will Hunting," the 1997 breakthrough hit (penned by Matt Damon and his pal Ben Affleck), knows not to judge the proverbial book by its cover.

To briefly recap the movie, "Will Hunting" (Damon), works as a janitor at MIT, and he can't help but tweak the geeks and intelligentsias by solving complex math problems while emptying trash cans. The movie made both Affleck and Damon the stuff of Hollywood legend, as they shared the Oscar for original screenplay, but it also made me uneasy about leaving confidential material in my office!

The catalyst for the cross-shredders in our offices may be directly traced to that motion picture, but the thought that the janitor may be more than he or she appears has dramatically increased our attention to security. Especially because we are constantly fine-tuning our proprietary search vehicles, Heat Seeker and Distant Thunder, and after subsequent filings with the U.S. Patent and Trademark Office, we've seen fit to aggressively restrict access to our works-in-progress.

However, it seems others may not have taken the same hard line with respect to access to their work product, and Hughes Supply (HUG) may be the latest example of prying eyes seeing something proprietary!

On Tuesday (Jan. 10), Atlanta-based Home Depot (HD) announced its intention to acquire Orlando, Fla.-based Hughes Supply for just upward of $3.5 billion. The fit seemed logical, as HUG has 500 locations in 40 states with about 9,600 employees (and $4.4 billion in revenue in '05), and the announcement swept HUG shares up $7 to an all-time high of $45.64!

Now, let's get to the reason I suspect Good Will Hunting may have been working at Home Depot, Hughes Supply, or the law firms or investment banks representing these respective players.

First, the background on Hughes Supply option-trading.

During the month of December, in which there were 21 trading days, a total of 2,931 calls and 1,208 puts on Hughes Supply changed hands. When you divide both call and put totals by those 21 trading days, you get an average daily volume of 139 calls and 57 puts. In other words, nobody really paid attention to HUG's announcement that it was considering strategic alternatives.

Now, let's fast-forward to January 2006. Here is a breakdown of the trading in Hughes Supply calls and puts by day:

Tuesday, Jan 3: 1,053 calls traded against 265 puts.

Wednesday, Jan. 4: 1,525 calls against 404 puts.

Thursday, Jan. 5: 164 calls traded against 34 puts.

Friday Jan. 6: 194 calls traded against 17 puts.

Monday, Jan. 9: 1,170 calls traded against 95 puts.

Thus, our computers showed that during three of the first five trading days in January, Hughes Supply calls traded an average of 1,249 contracts, or nearly 10 times the December average!

It doesn't seem likely that those extra 1,100 contracts per day were some big insider, or some institution that got tipped off, but with the takeover pushing shares $7 above last night's close, those 1,100 contracts on three of those five days add up to a fast $2.3 million!

If you are still a little skeptical about whether this option activity has picked up the potential takeover of Hughes Supply, then consider this. During the month of December, the average daily stock volume in Hughes Supply was 361,995 shares, but in the five trading days prior to the takeover, the volume swelled to an average of 548,000 shares per day!

It's been my experience -- watching and analyzing suspected "insider trading" action for the past 24 years -- that you cannot overlook anyone in the chain of custody of information and, thus, my "Good Will Hunting" theory!

My computer models support my belief that someone appears to have stumbled across the news of this takeover and profited mightily, but given the relative size of the trades, I suspect that the person or persons are not institutional traders.

However, because the person or persons invested through options, that implies a certain sophistication that one would rarely attribute to the janitor who cleans their offices -- but maybe they should!

CATCHING THE CHANGEWAVE -- NO WORK, ALL PLAY

PortalPlayer Inc. (PLAY), the maker of audio controller chips for Apple's video and nano iPods, has to -- HAS TO -- benefit from the unbelievable sales of 14 million iPods that Steven Jobs just informed us of at Macworld '06!

My target on PortalPlayer prior to these sales figures was $34 per share, but I've since moved my target to $39, as I expect momentum to continue for the ubiquitous iPods and, thus, lower-than-normal seasonal declines for PLAY.




I recommend investing in this company's exciting future by purchasing the PLAY May 30 Calls (PQPEF) for $5.10 and selling a like number of PLAY May 35 Calls (PQPEG) for $3. In doing so I will pay a net debit of $2.10 for that $5 bull-call spread.

To make a limited-risk investment in PortalPlayer, I recommend buying the PLAY May 30-35 bull-call spread for a net debit of $2.10.

TRADE DETAILS
All information is based on prices as of 1:30 p.m. Eastern on Wednesday, Jan. 11, 2006.

* 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 $2.10 for the PLAY May 30-35 bull-call spread through Wednesday, Jan. 18, as long as PLAY shares trade for $30.50 or higher.

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

Underlying Stock: PortalPlayer Inc. (PLAY)

Current Stock Price: $30.69

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	PLAY May 30 Call	$30	PQPEF	-$5.10
Sell	1	PLAY May 35 Call	$35	PQPEG	+$3.00
		Net Cost			-$2.10

*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 $2.10, 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 $2.10, or $210 for each spread.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the PLAY May 30 Calls (PQPEF) for $5.10 while simultaneously selling the PLAY May 35 Calls (PQPEG) for $3 puts you in the trade with a net debit of $2.10.

Our loss is limited to the $2.10 that we are paying for the spread. If, on the other hand, PLAY rises above $35 on or before May expiration, then we make $2.90 on our $2.10 investment!

SUMMARY

With PLAY trading for $30.69, a 1,000-share position would tie up $30,690. However, with our trade you'll be able to put just $2,100 at risk and have a potential gain of $2,900 if PLAY rises to $35 or higher.

Here's why:

* Our net investment on that bull-call spread is the difference between what we paid for the PLAY May 30 Calls ($5.10) and our credit on the PLAY May 35 Calls ($3), or a net debit of $210 per contract.

* With PLAY trading at $30.69, a 1,000-share position would cost us $30,690.

* Instead, if we buy 10 of the PLAY May 30 Calls (PQPEF) for $5.10 ($5.10 each times 100 shares = $510 per contract), or $5,100 and ...

* Against that purchase, we sell 10 of the PLAY May 35 Calls (PQPEG) for $3 ($3 each times 100 shares = $300 per contract), or $3,000.

* Thus, on a 10-contract spread we have only $2,100 invested, so that's all we can lose!

* If you follow these guidelines, this means your broker can pay no more than $2.10 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 contract in this example will cost you $210 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 $2.10 for this spread trade through Wednesday, Jan. 18 as long as PLAY shares trade for $30.50 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 PLAY shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $32.10 level. Likewise, while the stock is under $32.10, 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, $2.10.

Breakeven: $32.10

The breakeven is $32.10 because, as in any bull-call spread, the breakeven is determined by adding the net cost of the spread ($2.10 in this case) to the strike price of the call you are buying. Again, because we paid $5.10 for the PLAY May 30 Calls and took in $3 for the sale of the PLAY May 35 Calls, our net out-of-pocket is $2.10. You add that net to the strike price we've purchased ($30) and you get your breakeven of $32.10.

Max Profit: $290 per spread ($2.90 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 $5 ($35 - $30 = $5) and subtracting the amount we paid for the spread ($2.10) and is therefore $2.90. Thus, if PLAY is $35 or higher on expiration, then the spread will achieve that $5 max and, because we paid $2.10 for the spread, that would leave us with a $2.90 profit, or 138.1%. On a 10-contract spread, that would translate to a profit of $2,900!

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

BUY LIST UPDATE

Today we recommended buying the Apple (AAPL) Jan 75 Puts (QAAMO) on the offer for 30 cents to lock in our profits from our AAPL Jan 67.50-75 bull-call spread.

Back on Nov. 30, when Apple shares were trading at $68.17, the world thought they were overvalued. But we didn't, and now our spread is DEEP IN-THE-MONEY!

The Jan 75 Puts will lock in our bull-call spread at its full $7.50 value. Tell your broker to purchase a like number of Jan 75 Puts to the number of spreads you hold, because that purchase means you have the right to sell stock at $75 regardless of how low AAPL shares could fall.

So, if we have the right to buy stock for $67.50 a share through our ownership of the AAPL Jan 67.50 Calls (QAAAU) and have the right to sell stock for $75 via the AAPL Jan 75 Calls (QAAAO), then that spread will be worth $7.50.

The reason we recommend buying the put to lock in our profit is because we'd have to do two trades to close the bull-call spread otherwise, and that's two commissions, whereas buying the puts is a single-commission trade.

Thus, buy the put, lock in the HUGE $4.30 profit (remember, we got into the spread for a $2.90 debit and will spend 30 cents for the put; subtract that from the $7.50 value and you get the $4.30 profit, before commissions) and start dancing!

JOIN ME AT THE CHANGEWAVE LIVE ROUNDTABLE

The first ChangeWave Live Roundtable will be held at the World Money Show on Feb. 2, 2006, in Orlando, Fla.

In this rousing 45-minute roundtable discussion, you'll find out the "biggest waves" of growth that Toby Smith, Bryan Perry, Michael Shulman and I will be riding to big profits in 2006. Sign up today to attend the show:

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It doesn't matter whether you're a long-term investor or short-term trader -- the strategies you'll learn in my seminar, "Learn How Options and Insider Greed Can Make You Rich," will help you make more money. Get the information you need to reduce your risk and increase your rewards with options.

You also won't want to miss all the other fascinating and informative ChangeWave seminars. This is a great opportunity to meet your favorite ChangeWave adviser(s). We'll address the issues that concern you most, thus helping you to become a more skillful, knowledgeable and confident trader/investor.

The World Money Show will be held Feb. 1-4, 2006, at the Gaylord Palms Resort. Mark your calendar now to attend, and click below now to get your free tickets today.

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Good luck trading and remember -- pigs get fat, but hogs get slaughtered, so don't be a hog!

Jon "Dr. J." Najarian
Editor
ChangeWave Options Investor

P.S. If you'd like to know more about how I routinely turn the odds in my favor when trading options by using simple, easy-to-learn techniques, I will be hosting a FREE 60-minute teleseminar this month.

Not only will I show you how to take advantage of the enormous profit potential with options, but I'll also show you how to limit your risk and avoid the three common mistakes I see most option investors make.

Finally, I'll give you an opportunity to instantly put into practice what you learned by issuing an option trade that you can make immediately after the FREE teleseminar is done.

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