In an uncertain, if not difficult market environment, one should be avoiding the financial sector black hole and looking for income opportunities with an edge in a sector not burdened with debt. Here is an interesting one in the medical devices sector.

Boston Scientific Corporation (BSX) 8.18. Natick, MA based BSX develops medical devices and interventional medical specialty products. The company and Angiotech Pharma (ANPI) .37 filled an application for Premarket approval ((PMA)) with the FDA on February 5, 2009 for two TAXUS (Liberate Atom & long) drug-eluting coronary stents ((DES)) with a decision expected by year-end. PMA is the FDA process of scientific and regulatory review to evaluate the safety and effectiveness of Class III medical devices.

The Wall Street Journal online edition reports that Pfizer Inc. ([[PFE]] 17.45) is close to an agreement to acquire Wyeth ([[WYE]] 43.74) for between $65 and $70 billion in a cash and stock deal that would value WYE at about $50 per share. Furthermore, the report said that they have been in talks for months and that a deal may not be agreed upon. With a Historical Volatility of 42 and an Implied Volatility Index Mean ((IVXM)) of 43.33, here is a Calendar Spread idea using Friday’s closing (mid) prices.

• Buy WYE Jul 42 ½ call WYEGV 4.05 IV 29.01 Delta .5905

If long US Treasury Bonds are overpriced, here is a low cost hedge suggestion against rising long-term interest rates with defined and limited risk.

iShares Barclays 20+ Year Treasury Bond (TLT) 112.73. This ETF seeks to duplicate results corresponding to the price and yield performance of the long-term sector of the United States Treasury market as defined by the Barclays 20+ Year U.S. Treasury index.

In IVolatility Trading Digest™ Volume 8, Issue 47, Bad News, dated December 8, 2008 we suggested selling a Jan 70 put on Rohm & Haas (ROH) (64.76) based upon the proposed $78 per share takeover bid by Dow Chemical Co (DOW) (15.41).

Since then, the Kuwait Petroleum Company has indicated that it will back out of their proposed Joint Venture with Dow for a new company called K-Dow. Since Dow had been planning to use the joint venture proceeds to finance the ROH acquisition, it created doubt about the ability of Dow to continue with the ROH acquisition, causing the shares of ROH to drop more than 15 points to under 50. Now back at 64.76 some analysts think the deal will still be completed but at a new negotiated price. If so, the new price remains the subject of the current speculation.

London based BP plc (BP) (45.13) operates in two segments, Exploration & Production, and Refining & Marketing worldwide. In the western US they are the retail gasoline price leader with their many ARCO self-service stations.

The current annual dividend is 3.36 for a yield of 7.45%, which is more than twice the average dividend rate of 3.3% for the last five-years. Since their payout ratio is just 35%, they should be able to maintain the dividend rate from earnings. The total debt is $28.3 billion and the debt to equity ratio appears comfortable at .268. The book value is $33.87, making the current market price just 1.33 times the book value.

With the investment banks prominent role in the current financial and economic distress much attention will be given to Goldman’s earning report that could set the tone for the entire market this is week.

Investment and now commercial bank Goldman Sachs Group Inc. (GS) (67.74) will report earnings before the opening on Tuesday December 16, 2008. Taking our cue from Jamie Dimon at JP Morgan Chase & Co. (JPM), who said they are expecting a "terrible" fourth quarter, we wonder about the GS estimates for a loss of 3.50 per share. In the event the actual losses are larger than expected and the market takes the stock price lower here is a suggestion to hedge the downside for those long the stock or to take a short position for those who think the earnings estimates are not realistic. With a current Historical Volatility of 126 and an Implied Volatility Index Mean of 97.49 with a long-term forecast of 75, consider this suggestion.

Constellation Energy Group, Inc. (CEG) (27.58) supplies energy products and services to wholesale customers, and retail commercial, industrial, and governmental customers in North America with three operating segments: Merchant Energy, Regulated Electric, and Regulated Gas.

This is the company that Berkshire Hathaway (BRK.A) announced its MidAmerican Energy Company planned to acquire for $26.50 per share after Standard & Poor’s threatened a downgrade that would have required CEG to post another $3.3 billion of collateral for its trading and hedging operations.

Since we are beginning to see some quality stocks approach and, in some cases, rise above their downtrend lines, we think is about time to start looking at some world class companies offering good value at current prices.

Intel Corporation (INTC) (13.80)

Intel Corporation makes and markets integrated circuits for computing and communications industries worldwide. Its microprocessor products, including multi-core processors, quad-core microprocessors, 32-bit architecture microprocessors, and 64-bit architecture microprocessors.

Despite the continuing US dollar strength, gold turned higher on Friday with Comex cash gold breaking out above 778.16. Since gold is currently oversold this move could be just short covering, but it could also be the start of something more.

• This is a noteworthy breakout from a consolidation pattern formed by the October 22nd low for gold.
• Physical demand has been reported very strong perhaps reflecting a loss of confidence in the banking system.
• The long-term seasonal price pattern usually reaches its peak in late December.
• Hedge fund liquidations and tax loss selling may soon be ending.

This is an uncertain market environment and gold may be worth considering once again in the event this recent breakout proves to be more than just short covering.

According to the US Commerce Department, October retail sales declined 2.8% for the worst since 1992 with the decline being reported as broad and consistent outside of food.

Here is a short suggestion with a defined and limited risk for the retail sector using a bear put spread.  

Once again, interest in Yahoo (YHOO) is picking up now that it has lost the opportunity to do a search deal with Google (GOOG). Once again, there was speculation that Microsoft (MSFT) would make a bid to buy the company, but that idea was quashed by Steve Ballmer last Friday.   Bloomberg reported that he did say. “I’m sure there are still opportunities for some kind of partnership around search.” 

While Microsoft remains aloof, many analysts seem convinced that some sort of deal is still likely, even if it means a change in leadership at Yahoo in order for a deal to be made.

From an options perspective, the bottoming of the equity market provides an unusual opportunity since the options implied volatilities that have risen to abnormally high levels will start declining as the market turns higher. This usually provides many opportunities to sell options on good quality stocks having high options volatilities that are now declining.

Because there are still a number of concerns including the US elections, the upcoming  G-20 meeting, economic stimulus proposals, a homeowner’s bailout plan, and earnings estimate reductions, we think the best approach is to use good quality stocks paying good dividends.

From St Louis, Anheuser-Busch Companies Inc. (BUD) (56.93) makes and distributes beer in the United States and internationally. The domestic beers are Budweiser, Michelob, Busch, and Natural brand names.

BUD is in the process of being acquired by Belgian-Brazilian InBev at 70 in a deal that was agreed in July. Originally, they expected to close before year-end. Now, despite the management of both companies continuing to confirm the deal will close as expected, the stock price has declined and the option implied volatility is rising. 

Crude oil prices started their astonishing price rise in January of 2007 right on cue for a normal seasonal rise into the summer.  By August, prices were accelerating and continued higher going into the end of 2007.  The usual seasonal year-end decline was hardly noticeable. 

As 2008 began, crude prices seemed to be a one-direction trade as prices accelerated even faster. Something unusual was taking place in this market. OPEC and the Saudis claimed there was plenty of supply on the market but prices were being bid up regardless. Many analysts revived earlier predictions about peak oil and the impending decline in production as the justification for higher prices in anticipation of supply shortages in the future. Then in the middle of the summer the selling began.  Was peak oil just a multi-billion dollar hoax?

Here is a contrarian idea to consider in the financial sector using options to help define and limit the risk:

Interactive Brokers Group, Inc. (IBKR) 24.19. a Greenwich, Connecticut based IB serves both institutional and individual customers offering automated global electronic market making and brokerage services. It engages in order routing, executing and trade processing for equities, futures, and foreign exchange instruments on 70 electronic exchanges and trading venues worldwide. It provides bid and offer quotations on approximately 420,000 securities and futures listed on multiple electronic exchanges. The company also offers an order management, trade execution, and portfolio management platform to access multiple asset classes, such as stocks, options, futures, foreign exchange, and bonds.

Consider this suggestion for income using a collar to hedge the downside risk. First some background on collars.

Collar

After consolidating and making a continuation pattern between 76 and 77, the US Dollar Index [DX] broke out above 77 ½, traded as high as 79.077 on Thursday and then closed Friday at 78.932.

For a currency with many trillions outstanding, we think a 10.87% move in seven weeks is “too high too fast” and we should now expect a correction back to 76 or perhaps even 75. The apparent overhead resistance is at the 80 level where it made a pivot at 80.39 before turning higher on December 27, 2004, and then again when it traded between 80 and 81 for six weeks during the summer of last year. While exchange rates move primarily in response to news that alters expectations about the future economic environment and the relationships between economies, this rapid move has the look of short covering.

Here is an alternative long US dollar suggestion. 

Consider looking at the CurrencyShares Euro Trust (FXE) 147.20 using a bear put spread as an alternative to a bull call spread on the PowerShares DB US Dollar Index Bullish (UUP) 23.94.

For the third week, the US Dollar Index Cash  [DXY0] 76.81 [ICEUS] is in the macroeconomic and financial markets spotlight.  

The rapidly rising US Dollar Index reflects the perception of economic weakness spreading to the major trading countries and the narrowing of the US trade deficit from declining imports and improving exports, that will cause an upward revision in the second quarter GDP growth rate. 

As a regular feature on the IVolatility.com home page, we list the Top 5 most expensive stock options relative the underlying stocks with the thought of finding options that we can sell to take advantage of the higher option prices.

From our Advanced Ranker scan here is the best of the Top 5: