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Looney 'Toons

February 08, 2006

Dear Fellow Options Investor,

Our ChangeWave editorial group gathered in Orlando, Fla., last week for the World Money Show. It's a great get-together, and one particular highlight was our inaugural "ChangeWave Roundtable" featuring Tobin Smith, Bryan Perry, Michael Schulman and me. The information from my fellow panelists was first-rate, of course, and it was a rare and wonderful experience to have all of us in the same place at the same time!

The most frequently asked question at the Money Show was what we thought the situation in Iran would mean for the markets, but even as we were addressing the question, the craziness over some cartoons of Prophet Mohammed took center stage in the news headlines.

Personally, I can understand the situation surrounding Iran's uranium enrichment program, but embassy burnings and killings over some Danish cartoons that were actually reruns from a September edition of the paper? Come on!

I can only imagine what an event it will be when Hamshahri (the best-selling newspaper in Iran) announces the winner of its contest to create the meanest Holocaust-themed cartoon in retaliation. I mean, on one hand we're talking about Iran being two short steps from nuclear weapons and on the other hand we're trying to quell riots over cartoons!

At least this craziness took my mind off how Seattle coach Mike Holmgren and not the zebras blew the Super Bowl for the Seahawks!

CATCHING THE CHANGEWAVE -- PROFITS IN THE PIPELINE

Today (Wednesday, Feb. 8), AstraZeneca PLC (AZN) hit our Distant Thunder program that tracks longer-term bullish buying patterns in options and futures. This is a $74 billion pharmaceutical monster, with a host of successful drugs -- 46, by my count -- that treat everything from infections to cardiac problems to cancer.

I also did a quick check of the company's pipeline summary and found no fewer than 103 drugs working their way through pre-clinical trials to Phase III studies, and a smash hit from one or more could easily boost shares 10% -- in, if you'll pardon the pun, a heartbeat!

Our computers show very active buying at the April 50 Call strike, which is nearly $4 out-of-the-money (April 50 Calls ($50) - $46.17 stock price = $3.83 out-of-the-money). At mid-session we found nearly the entire open interest changing hands, with 2,600 calls trading and all but 10 of those calls purchased on the offer!

Why the rush to get in on a day when AZN is just lying around? The calls are up more than 40% to 85 cents, up from 60 cents last night.




Here's how we're following the smart money, just as we did last week in WebEx Communications. The only exception this week is that our outlook is a little further down the road than the mere 48 hours in which we were able to take profits in WebEx!

I recommend telling your broker to buy the AZN April 45 Calls (AZNDI) and sell a like number of AZN April 50 Calls (AZNDJ) for a net debit of $2.10. Prices that work for do-it-yourselfers are paying $2.85 for the April 45 Calls and selling the April 50 Calls for 75 cents.

To make a limited-risk investment in AstraZeneca, I recommend buying the AZN April 45-50 bull-call spread for a net debit of $2.10.

TRADE DETAILS
All information is based on prices as of 2:10 p.m. Eastern on Wednesday, Feb. 8, 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 AZN April 45-50 bull-call spread through Wednesday, Feb. 15, 2006, as long as AZN shares trade for $45.85 or higher.

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

Underlying Stock: AstraZeneca PLC (AZN)

Current Stock Price: $46.17

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	AZN April 45 Call	$45	AZNDI	-$2.85
Sell	1	AZN April 50 Call	$50	AZNDJ	+$0.75
		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 per spread, or $210 for each contract.

For those of you who are do-it-yourselfers and are making the trade online, an order to buy the AZN April 45 Calls (AZNDI) for $2.85 while simultaneously selling the AZN April 50 Calls (AZNDJ) for 75 cents 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, AZN rises above $50 on or before March expiration, then we make $2.90 on our $2.10 investment!

SUMMARY

With AZN trading for $46.17, a 1,000-share position would tie up $46,170. However, with our trade you'll be able to put just $2,100 at risk and have a potential gain of $2,900 if AZN 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 AZN April 45 Calls ($2.85) and our credit on the AZN April 50 Calls (75 cents), or a net debit of $210 per contract.

* With AZN trading at $46.17, a 1,000-share position would cost us $46,170.

* Instead, if we buy 10 of the AZN April 45 Calls (AZNDI) for $2.85 ($2.85 each times 100 shares = $285 per contract), or $2,850 and ...

* Against that purchase, we sell 10 of the AZN April 50 Calls (AZNDJ) for 75 cents (75 cents each times 100 shares = $75 per contract), or $750.

* 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, Feb. 15, 2006, as long as AZN shares trade for $45.85 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 AZN shares, you can see that the trade becomes profitable (green area) when the underlying stock crosses the $47.10 level. Likewise, while the stock is under $47.10, 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: $47.10

The breakeven is $47.10 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 $2.85 for the AZN April 45 Calls and took in 75 cents for the sale of the AZN April 50 Calls, our net out-of-pocket is $2.10. You add that net to the strike price we've purchased ($45) and you get your breakeven of $47.10.

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 ($50 - $45 = $5) and subtracting the amount we paid for the spread ($2.10) and is therefore $2.90. Thus, if AZN is $50 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%. 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.

THE NEW YORK TRADERS EXPO IS JUST AROUND THE CORNER

Attend the Expo and you'll discover how to make 10% a week trading energy ETFs, follow the smart money to find tomorrow's big winners, book 50% profits on 5% swings and short stocks.

For your convenience, the complete schedule is provided below. Sign up today to get your free tickets:

http://www.newyorktradersexpo.com

SUNDAY, FEB. 19, 2006

* 5 p.m.-6 p.m.: Toby Smith -- Make 10% a Week Trading Energy ETFs
In this informative 60-minute session, you'll learn how to make 10% a week using energy ETFs. By utilizing basic technical analysis, I'll show you how to trade the energy market for consistent profits.

MONDAY, FEB. 20, 2006

* 8 a.m.-9:30 a.m.: Bryan Perry -- Shorting Stocks 101
As a trader, you need to know how to make money on both sides of the market. In this seminar, Bryan will provide step-by-step instructions on how you can short-sell like a pro.

* 5 p.m.-6:30 p.m.: Jon Najarian -- How to Follow Smart Money into Tomorrow's Big Winners
Using ChangeWave Alliance research and Jon's proprietary software, he'll show you how to legally recognize unusual buying activity. By following the smart money, you'll be able to post 100%, 200%, or even 300% returns with limited risk.

TUESDAY, FEB. 21, 2006

* 8 a.m.-9:30 a.m.: Bryan Perry -- Booking 50% Profits on 5% Swings
Learn step-by-step methods on how to trade in-the-money options on big name stocks. This is one of the most powerful methods by which to leverage your profits in a disciplined manner without expecting too much from the market or any particular stock.

You'll also learn how to trade deep-in-the-money puts and calls to generate explosive gains on small moves and how to screen for the right stocks. In addition, Bryan will give you a few option trades you can make immediately.

In addition to the regular seminars, Jon Najarian, Bryan Perry and I will be holding booth-side seminars. So make sure you stop by booth #5804-5806 and learn techniques you can use immediately in your trading. Stay turned for exact times.

CAN'T MAKE IT TO THE BIG APPLE?

And as an added benefit to those of you who can't make the show, several of our sessions will be webcast live! Here's the complete schedule:

Make 10% a Week Trading Energy ETFs

Booking 50% Profits on 5% Swings

How to Follow Smart Money into Tomorrow's Big Winners


By taking advantage of these webcasts, you'll improve your chances of profiting from upcoming market opportunities and reaching your trading goals in 2006.

There is no substitute for being an informed trader. Whether you're new to trading or a seasoned veteran, we know that you'll benefit from watching these presentations, and as a result, we're excited to extend this invitation to you.

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