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Binary Options in the Digital Age

February 22, 2006


Dear Fellow Options Investor,

My thanks to all of you who came to our ChangeWave booth and/or my presentation at last weekend's New York Traders Expo. In fact, there were so many of you that the fire marshal darn near closed down my presentation!

I kid you not, folks -- there were so many people in the room that we went beyond standing-room only! What's beyond standing room? How about laying room! That's right, there were people lying on the floor just to be part of the show!

Next time we're going to try to secure a bigger room at the Traders Expo, and hopefully the Money Show in Las Vegas (May 15-18) will be able to accommodate everyone a little more comfortably!

Today (Feb. 22) the Chicago Board Options Exchange (CBOE), the world's largest options exchange, announced a strategic alliance and investment in HedgeStreet Inc., the newly designated U.S. exchange for binary options and futures.

That might not mean much to you, but HedgeStreet's binary options are a very compelling investment vehicle. Binary options are essentially a yes/no investment that you either win or lose on your bet that housing prices, Consumer Price Index (CPI), weekly mortgage rates, crude oil, etc. will finish above or below whatever level you have picked.

For instance, if I wanted to invest in the chance that crude oil will rally from $61 to $62 this afternoon, I can buy the 62 Binary Call on HedgeStreet.com. I might pay $3 for that 62 Call, but if I'm right and crude oil rallies to $62 or higher, my binary option cashes out at $10, or a profit of $6 per contract. If, on the other hand, I thought crude oil wouldn't rally to $62 or higher, I could sell that same contract for $3.

Imagine taking on an investment in the February employment data on March 3 or in housing starts next week. As of this writing, the most popular binary options on HedgeStreet.com were crude, natural gas and Fed Funds.

With natural gas trading for $7.39, today's $7.70 binary was trading for just 41 cents. And because the payout is $10, that means a sharp rally would turn that 41-cent investment into a $9.59 profit!

When you look at the incredible market for such instant right-or-wrong, win-or-lose investments, you can see why the CBOE decided to make its investment (along with Wells Fargo) in the future of HedgeStreet's binary option market. I suspect you will be hearing great things about this strategic alliance, especially with the new contracts the CBOE and HedgeStreet will bring on in the coming months.

CATCHING THE CHANGEWAVE -- 'BANKING' ON SOME QUICK PROFITS

Shares of multibank holding company Marshall & Ilsley Corp. (MI) and options on MI both registered on our Heat Seeker program that tracks unusual buying patterns in stocks, options and futures.

The option activity was targeting the out-of-the-money MI March 45 Calls, which are trading for 40 cents. According to our computers, this series traded a grand total of one single contract yesterday and had an open interest of just 974 contracts, but thus far today more than 1,200 MI March 45 Calls have changed hands!

That might not seem like a very large position, but last week the daily call volume in Marshall & Ilsley was 129 contracts across all series! Virtually every single one of those 1,200 contracts were purchased on the offer, which means someone thinks it's likely that MI will move up to and through $45 in the next few weeks -- and we're going to coattail those investors!

I recommend telling your broker to buy the MI March 45 Calls (MICI) for up to 45 cents, but try to get them for 40 cents, as they keep showing offers at that level. I only recommend paying 45 cents until Friday, Feb. 24, with MI trading $44.10 or higher.

* Remember, you can pay up to 45 cents for this option through Friday, Feb. 24, 2006, as long as MI shares trade for $44.10 or higher.

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