Get Your Hands on MITTS

08/05/2005 12:00 am EST

Focus:

Lawrence McMillan

Founder and President, McMillan Analysis Corporation

Larry McMillan, an options expert, is focused on very sophisticated trading strategies. As such, I'd emphasize that his advice is meant for those who fully understand the complex arena in which he operates. Here, he looks at a "structured product" known as MITTs.

"Structured products generally offer a very low-risk way to participate in the stock market. Here, we want to concentrate on the products issued by Merrill Lynch, known as MITTS. Currently, there are 18 MITTS traded on the AMEX. Some of these combine the protection of a structured product with the ability to participate in the upside of a specific exchange traded fund. To better explain, let’s use the Biotech HLDRS (BBH ASE) as an example.

"The  Biotech Holder MITTS (BHM ASE) use the Biotech HLDRS as their underlying index. BHM and BBH trade just like stock on the AMEX. What BHM gives you is this: the full percentage appreciation of the BBH HOLDRS above a price of 176.875 up until August 2007. If BBH is below 176.875 at that time, you’ll receive $10 cash for your BHM shares. We like the Biotech Sector right now, as it has broken out to the upside. BBH is trading at 179.50, and BHM is trading at 11.30. That’s expensive for BHM, but it means you're risking $1.30 for unlimited upside over the next two years in BBH.

"Let’s say, at maturity, BBH has risen to 212.26, which would be 20% above the 'striking price' of 176.875. Then the BHM MITTS would be worth $12, for a 20% increase above their 'guarantee price' of $10. Currently, BHM’s theoretical value is only 10.15, since BBHnow trading at 179.5 is only 1.5% above the striking price of 176.875. So, as I said, BHM is overpriced. You would want to wait for it to return to fair value before buying, but it is certainly worth watching, if you agree with us that the Biotech Sector looks attractive.

"Some of the other MITTS we would consider are based on various ETFs such as Broadband HOLDRS, Select Energy SPDRS, and Internet HOLDRS. The complete list of structured products that trade on the AMEX can be found at www.amex.com. If you call the phone number listed (212-306-1659), you can obtain a prospectus."

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