Ideas:

On Jan. 4, 2007, as you recall, I mentioned that MO (Altria) was planning to spin off Kraft and that the gift would add significant value for the shareholders. Since then, volatility is beginning to tick up in anticipation, the stock has climbed 3% and today UBS has put out a report stating that Altria will spin off Kraft by the end of May 2007 and increased their price target for the stock. Whether the stock goes higher or drops on the announcement (sell the news scenario) I cannot predict but I can say that option premium should expand right up to the Jan. 31, 2007 meeting when the company announcement is expected.

The Energy stocks relative to the Crude futures have been fairly stable. According to Bloomberg, XLE (Energy Select Sector) has been holding at an implied option volatility of around 26%, suggesting stable prices in the future. Implied volatility in the options on the crude futures has been increasing over the last week. Only COP and XOM appear to have any significant increase in implieds whatsoever. I tend to believe that all markets liquidate and terminate their selling with a capitulation. Oil/crude appears to be approaching this psychological level at breakneck speed and with it should come higher volatility in the energy related stocks.

 U.S. Equity Market Commentary:

Although the major market indices finished off their intraday highs, the day saw gains. The Dow Jones Industrial Average added nearly 73 points to vault back above the 12,500 level and hit a new record closing level. Only five of the Dow components slipped into negative territory, led by Boeing (BA). Leading the remaining components higher were United Technologies (UTX) and Microsoft (MSFT). The S&P 500 Index added nearly nine points on the day, and the NASDAQ added more than 25 points. Market internals were over 2:1 in favor of advancers. Crude was again a loser falling $2.14 to finish at $51.88 on the NYMEX. This is the lowest level since May 2005. TRF (Russia) saw some upside as they reopened a pipeline.Treasury prices dropped today, pushing the benchmark yield to a two-month high. This move followed a surprise rate increase by the Bank of England, which caused investors to focus on the strength of the global economy.

Equity Options:

What can I say about the January 2007 expiry? All of you will breathe a sigh of relief when it is off your sheets. Today saw two way action in the front month options as traders liquidated positions ahead of next weeks expiration. VTS was the standout with dividend related trades. There was also heavy front month trading in names that have been highlighted by news this week. i.e. AAPL, NOK, MSFT. INTC jan.'07 22 calls were bought ahead of earnings next week. GM jan.'07 30 calls were sold, there was a seller at .90 vs 30.70 x 2k and C Feb.'07 52 calls trade 2k at 2.20 vs 54.10. FNM Jan.'07 50-60 put stupid was bought at 7.60 vs 58.40 x 1700. In the longer term options EMC Jan.'09 15 calls were bought x 5k at 2.225 vs 14.35, MOT Jan.'08 20 calls traded 1.20 x 10k and a seller of MSFT Jan.'08 30 calls x 30k, I saw a level of 3.10 vs 30.18 shopped around.

Equity Indexes:

The SPX Jan.'07 1400 puts were the highlight again today, hearing that a large player showing an offer of this strike this morning sparked the rally when the market looked like the seat belts were fastened and tray tables were up for a sell off.

Regards,

Harley Evans

optionadvice@aol.com