Dow Jones 10641.94 +83.19 8:54 am PST, September 18, 2005  NASDAQ 2160.35 +0.66 For info, visit access.smallcapnetwork.com S & P 500 1237.91 +10.18 Change your subscription status here Russell 2000 671.98 +6.56 VOLUME 05: ISSUE 71  Feature: Taking the Risk & Volatility Out of Merck Once you've absorbed this risk-reduction strategy, it could well be applied to almost any optionable stock, ETF or index.  With the second Vioxx trial now underway, Merck (NYSE: MRK) is once again in the news. I thought it would be valuable to discuss some strategies to reduce the ownership risk for those who want to go against the anti-Merck tide. Or protect a position from potential disaster. At the moment, the media would have us believe that Vioxx defines Merck. Certainly, in our opinion, the company should, if its liability grows, construct some form of settlement for those patients harmed by the drug after long-term use. As we mentioned in our August 26th piece, if there is wrongdoing, Merck should be held accountable.  However, as this link (http://www.merck.com/finance/annualreport/ar2004/pdf/Merck_2004_AR_Pipeline.pdf) evidences, the future product pipeline for Merck is deep and impressive. One example is the potential for Merck's HPV/Cervical cancer vaccine Gardasil, currently in Phase 3 trials. From MedicalNewsToday: "Over the two and a half years of follow-up after vaccination, Gardasil? reduced the combined incidence of persistent infection from HPV 6, 11, 16, or 18 and related genital disease including new cervical pre-cancers and genital warts by 90 percent compared with placebo among women who were naïve to the relevant HPV types at baseline (p<0.001)". The entire article is here: http://www.medicalnewstoday.com/medicalnews.php?newsid=22445.  Over 250,000 women die from cervical cancer each year, most of them in the developing world. Of the 500,000 cases of cervical cancer diagnosed annually, 70 percent are attributed to infection from HPV-16 and 18. Do the math. The point is this: Is Vioxx a problem? Sure, and I don't make light of the suffering of those who were allegedly harmed by the company's actions. Do I think Merck will survive? Yes. Patients and the medical community will continue to demand cutting edge therapies, drugs and vaccines as the population ages and requires better and more sophisticated care. So, what to do? Merck closed at $28.90, Friday. We first mentioned it at $27.50 on August 26th. As well, the company pays a quarterly dividend of 38 cents. The yield on Merck is currently 5.25 percent with an annual cash value of $1.52. The dividend could well be cut or reduced depending on any potential settlement terms, but that's a ways down the line, if ever. There is little doubt that as time progresses, Merck's share price will move decisively. To simply purchase 'naked stock' would likely be the riskiest strategy given the fluid nature of the situation. For those who want to reduce risk and have intelligent exposure to the company, our old friends in the listed options market may well fit the bill. Here's the deal--and I'm not including commissions. These prices are as of the close Friday, but the combined sums will work as the put price adjusts against the stock price.  If one purchases Merck at say $29, it would be prudent to match that with a purchase of the April 2006 30 puts at $2.75. That means that the combined per share cost would be $29 plus $2.75 or $31.75. The put gives you the right to sell the shares at $30 anytime until April 21st, 2006. By that time if not before, there will likely be some clarity to the Merck situation. Not to mention the potential for good news that could well move the shares significantly higher. The April 2006 Options are here: http://finance.yahoo.com/q/op?s=MRK&m=2006-04 and you can click across the top of the page for longer or shorter expiries.  This 'married put' strategy quantifies your total risk on a Merck position to $1.75 a share or roughly 6 percent since in a worst case scenario, you can always sell your stock at $30 during the life of the put. A whole lot less risk than if you purchase Merck here on it's own and something untoward happens. As well, should the dividend stay in place, any payments would offset the cost of the put, although, as I said, best not to depend on that. Any dividend payments that are paid, however, would accrue to you the shareholder, regardless of the put position. As well, the shares would have to exceed $31.75 before you would be in an overall profit position.  In essence, you're risking only 6 percent of your upside to insure against a much greater potential decline until April 2006. A cheap price to pay, in my opinion. As well, the strategy has the flexibility of allowing an investor, should the shares move lower, to sell the put and hold the shares, sell the shares and hold the put, or simply take back your $30 a share by exercising the put and moving on.  While the strategy is in place, the investor enjoys enhanced flexibility, vastly reduced risk and is in complete control. Pretty cool, no? As Merck has moved higher and surprised a market that was playing taps for it a few weeks ago, the put premiums have fallen. Good news for those investors who want to lock in and quantify their risk for the next 6-7 months. Each option contract represents 100 shares of stock. Therefore, one contract at $2.90 would cost $290 before commission. They can be traded just like stocks and can be extended, shortened or sold at the investor's discretion. The flexibility gained for both new purchases or to lock in profits has been an extremely useful market-tested strategy employed for years.  In our example we've used Merck. Have a peek at any favored large cap and see if the strategy makes sense, especially when you find yourself in a decent profit position. The put strategy virtually removes the volatility of new positions during the option's life. And that's a good thing. One more thing. Ever wonder how options are priced? Traders use the Black Scholes Model, which is now standard in most scientific calculators. Here's the formula: Enjoy....     We Value Your Feedback Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 3525 Del Mar Heights Rd #334 San Diego, CA 92130 Subscribe Information is power and timely information is profitable. 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