Altria (NYSE: MO - option chain) stock is falling today after a Florida jury found that the death of a smoker was caused by his addiction to cigarettes. MO's subsidiary Philip Morris now is involved in the second phase of the trial , which is to decide who is at fault for his addiction. This is the first case in which an individual smoker's family sued a tobacco company for death by cigarette addiction. This is a tough precedent for MO and the cigarette industry, as it opens the industry up to potentially limitless civil suits from individual smokers.

While I believe that cigarette stocks are well-suited to our current environment, Phillip Morris International (NYSE: PM), a former subsidiary of MO, looks much more attractive to me, due in part to its lower exposure to the American legal system. PM is off by only 0.6% today compared to MO' s 3.5%. If you think Altria stock won't be rising too far in the coming months, then it could be a good time to look at a bearish hedged play on MO.

Phillip Morris International (NYSE: PM - option chain) shares are relatively flat today in the face of a bearish market as the company announced it will raise its regular quarterly dividend to 54 cents. As long as they pay that dividend quarterly, then this makes a tidy 4% yield.If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on PM that can take advantage of that dividend.

PM opened this morning at $53.76. So far today the stock has hit a low of $53.66 and a high of $54.46. As of 12:35, PM is trading at $53.96, up 4 cents(0.1%). The chart for PM looks bullish and S&P gives PM a positive 4 STARS (out of 5) buy ranking.

For a bullish hedged play on this stock, I would consider a March covered call at the $60 level. A covered call is an options position that combines the purchase of stock with the sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make an 8.4% return in 7 months if PM is above $60 at March expiration. But unlike our normal credit spread trades, that is not the goal here. This position turns out strictly better than buying and holding the stock if it is below $61.25 at March expiration, and it makes a reasonable return in the unlikely event that the stock rises to that level. Plus, you can probably expect to catch at least two dividend payments over that time. We get about 2% of downside protection on this pretty stable stock by using a covered call. Learn more about this type of trade here.

PM has shown support just below $54 recently.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in PM.

Philip Morris (NYSE: PM) closed at $50.60 Tuesday.

• Altria Group (NYSE: MO) completed its spin-off of PM on March 31.
  
• PM over all option implied volatility is at 23 according to Track Data.

Volatility Index S&P 500 Options-VIX at 22.36; 10-day moving average is 23.98

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

MOST NOTEWORTHY: WSP Holdings, Harris and XTO Energy were today's noteworthy initiations:

• Oppenheimer believes WSP Holdings (NYSE: WH) is benefiting from rapid growth in the oil and gas exploration market and a move toward deeper and harsher environment drilling. The firm has an Outperform rating and $9.50 target on the stock.
  
• UBS assumed Harris (NYSE: HRS) with a Buy rating and $63 target, as they see upside to the company's FY09 estimates driven by RF Communications. UBS views the recent pullback as a buying opportunity.
  
• Morgan Keegan is positive on XTO Energy's (NYSE: XTO) projected 20% production growth, value building through acquisitions, and valuation; shares were initiated with an Outperform rating.

OTHER INITIATIONS:

• Goldman started Philip Morris (NYSE: PM) with a Buy rating and $60 target.
  
• Lamar Advertising (NYSE: LAMR) was assumed with a Sell rating at Merrill Lynch.
  
• Broadpoint initiated Nova BioSource (AMEX: NBF) with a Buy rating.

Philip Morris (NYSE: PM) closed at $50.58.

Altria Group (NYSE: MO) completed its spin-off of PM on March 31.

Goldman has a 12-month price target of $60 on PM and says: "A premier tobacco company deserves a premium valuation."

PM overall option implied volatility is at 26 according to Track Data.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

The U.S. Supreme Court rejected Big Tobacco's appeal [subscription required] to throw out all of the remaining $145 billion class action against the major tobacco companies. Although the Florida Supreme Court had dismissed most of the case, 700,000 plaintiffs received the right to "use findings from the extensive jury trial to bring new cases against the tobacco companies," according to The Wall Street Journal. It gives the smokers and their families the ability to use old evidence in a new case.

A number of investors questioned the plan for Philip Morris parent, Altria (NYSE: MO) to spin-off its international tobacco operations. The overseas business is larger than the domestic one and is growing faster as smokers in areas like China become more inclined to use U.S. brands.

Part of the reasoning for the spin-off was to firewall Philip Morris International and its balance sheet from potential legal claims against the parent. It appeared that most of the class action suits against Big Tobacco were at an end, but the new legal decision shows that the assumption was not entirely true. The suits were based on the accusation that Big Tobacco knew the dangers of smoking but hid them from the public. That, in turn, caused millions of illnesses and deaths.

If the Florida decision is a set-back for Altria, the Philip Morris International business may have already left the building to pursue business overseas without the weight of decision in the U.S. legal system.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Altria Group Inc. (NYSE: MO) is higher this morning as a Citigroup (NYSE: C) analyst stated this morning that she is 80-90% sure that sometime this week, Altria's board will approve spinning off Philip Morris International as a separate stock from Phillip Morris USA. MO spun-off Kraft Foods (NYSE: KFT) earlier this year to the delight of investors. If you think MO won't fall by too much in the coming months, now could be a good time to look at a bullish hedged trade.

MO stock has been relatively flat for the better part of a year, with resistance in the low $70's. This morning, MO opened at $70.00. So far today the stock has hit a low of $69.69 and a high of $70.99. As of 10:40, MO is trading at $70.63, up $1.44 (2.1%). The chart for Altria looks bearish and steady, while S&P gives the stock its highest 5 STARS (out of 5) strong buy rating.

For a bullish hedged play on this stock, I would consider a December bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 6.4% return in just 4 months as long as MO is above $60 at December expiration. Altria would have to fall by more than 15% before we would start to lose money.

MO hasn't been below $60 since October and has shown support around $67 recently. This trade could be risky if anti-tobacco litigation picks up in the coming months, but even if that happens, this trade could be protected by the strong support between $63 and $65.

Brent Archer is an options analyst and writer at Investors Observer.

DISCLOSURE: At publication time, Brent owns and controls a bullish hedged position in MO.

The Family Smoking Prevention and Tobacco Control Act, to be voted on today by the Senate Health Committee, seems on the fast track to approval. If passed into law it will place the tobacco industry under the oversight of the Food and Drug Administration. The measure, supported by health groups and some of the industry, will give the agency some broad powers in regulating the contents and sales of tobacco products.

Industry heavyweight Altria Group's (NYSE: MO) Phillip Morris favors the bill, but others such as Reynolds American's (NYSE: RAI) R.J. Reynolds oppose it, claiming the regulations would limit its ability to compete with the market leader.

Shares of Altria Group, Inc. (NYSE: MO) fell today after the cigarette maker disappointed Wall Street, missing analysts' expectations and cutting its earnings guidance for the year to $4.05 to $4.10 per share down from April's $4.20 to $4.25 level.

Earnings per share were $1.05, down from $1.29 last year and under the $1.13 of First Call estimates. Revenues grew almost 10% year-over-year to $18.8 billion, the company said. Bloomberg News notes that the U.S. business is declining at a faster rate than analysts expected.

Simultaneously, the company is acquiring a 30% stake in a Mexican tobacco business from Grupo Carso. CFO Dinyar S. Devitre noted that the international businesses are ready to be split up, although no timing has been given. And who said smoking is a dead-end business? Altria shares are actually up since the company completed its Kraft Foods (NYSE: KFT) spin-off, and shareholders still have the likely spin-off of Phillip Morris International coming down the pipe.

Many investors would have thought the company's future was in the ashtray, but the company has defied the skeptics, even though everyone knows that its products kill. Actually, shares are up considerably over the last 10-years and it has paid significant dividends. Even the states don't want the company to entirely disappear because cigarettes are responsible for generating huge amounts of tax revenue.

Investors may not all be tobacco fans, but they probably all will say "Keep Smoking!, thanks for the money."

Jon Ogg is a partner at 24/7 Wall St.; he does not own securities in the companies he covers.

Merck & Co., Inc. (NYSE:MRK) made the decision to litigate any claims that consumers have about the side effects of it drug Vioxx. There were studies that indicated that the drug could cause heart attacks in some patients.

Merck is facing 27,000 lawsuits from patients who posit that Vioxx caused them health problems. The company has decided to try the cases instead of attempting to enter into one large settlement covering all claims. Not unlike Altria Group, Inc.'s (NYSE:MO) Philip Morris and its tobacco litigation, Merck knows that the cost of bringing suit against it is substantial, so if the company wins a number of early cases, other plaintiffs may back off.

A jury in New Jersey has now found that Merck did recklessly promote the drug and awarded a patient $47.5 million. Merck will obviously appeal the case.

The brilliance of Merck's move to try cases with the goal of wearing down Vioxx claims may be the company's downfall. A raft of "wins" against the company could drive its liability into the billion of dollars. At that point, the company's future could be at stake.

Douglas A. McIntyre is a partner at 24/7 Wall St.

Note: The Daily Option Update is provided by Options Specialist Paul Foster of theflyonthewall.com.

Volatility Index S&P 500 Options-VIX down .47 to 10.49 after FOMC leaves rates unchanged at 5.25%

Comcast Corp. -(NASDAQ:CMCSK) option prices reveal subtle risks as expected into 2/1 EPS. Comcast will report EPS before the open on 2/1. Comcast February 45 straddle is priced at $2.30, above its theoretical value of $1.96 according to Track Data, suggesting increasing near term price fluctuations risks into EPS.

Google Inc.-(NASDAQ:GOOG )February option implied volatility elevated as expected into EPS. Google will report EPS after the close tonight. American Technology says "expect a solid report after close; Flat stock may reflect lower expectations." Google call option volume of 84,845 contracts compares to put volume of 54,692 contracts. Google February option implied volatility of 45 is above its 26-week average of 34 according to Track Data, suggesting larger price risks.

Option volume leaders today were: Altria Group Inc. (NYSE: MO), SanDisk Corp. (NASDAQ:SNDK), Citigroup (NYSE:C), Bristol Myers Squibb (NYSE:BMY) and Microsoft Corp.(NASDAQ:MSFT).

Tom Slee of Internet Wealth Builder thinks blue chip Altria Group Inc. (NYSE: MO) has "a lot of upside potential' and has chosen the stock as his latest special situation buy.

He notes that while MO is a consumer products goliath with global sales of about $100 billion per annum, at the end of the day, it is a tobacco company, with 71% of its operating profit results from the U.S. and International tobacco divisions."

He admits that many investors might wish to avoid the stock based on moral grounds, but he adds, "Despite its role in cigarettes, one thing is certain: Altria is an extremely well-managed company."

(I'd add that it is now one month since I quit smoking, so this write-up should not in any way be viewed as an endorsement of the firm's tobacco business.)

Slee continues, "Despite declining cigarette use in North America, the firm's earnings have still grown at almost 8% a year for the last decade. Further, the company distributes almost 60% of its profits as dividends."

The big news according to the advisor is management's belief that it can increase shareholder value by breaking-up its holdings. He notes that the break-up was scheduled to take place a few months ago but put on hold because of the $200 billion Schwab lawsuit overhanging the tobacco industry.

However, Slee believes that the recent elections were positive for cigarette manufacturers and sees a window of opportunity in which the company might move ahead with a restructuring. He notes, "There is an excellent chance that Altria will announce plans to spin off Kraft on Jan. 31 to shareholders."

His bottom line for more aggressive investors willing to consider a special situation is to buy Altria at $84 with a target of $98, anticipating that a distribution of Kraft might provide a bonus.

Steven Halpern is the editor of TheStockAdvisors.com, a free daily overview of the latest stock recommendations from the financial newsletter community.

A federal appeals court is reviewing the decision to let a group of smokers file a class action suit that claims "light" cigarettes were marketed as being safer than regular smokes.

While it is hard to determine what damages the suits could bring to tobacco companies if they are successful, the plaintiffs claim that big tobacco brought in between $120 billion and $200 billion in "light" sales. Why their lawyers cannot get to a number in a slightly tighter range is hard to understand.

On Friday, when the news hit the wire, shares in Altria Group (NYSE:MO), parent of the largest tobacco company Philip Morris, rose almost $1.50 to just under $85. As the litigation has favored Altria and its counterparts, the company's stock has gone from $28 in May 2003 to the current level.

However, the "light" cigarette wrinkle is fairly new. Older suits were based on the simple premise that tobacco companies hid the risks of smoking and marketed products that they knew were dangerous. The treachery alleged in the "light" case is a bit more subtle. And, perhaps more complex.

Altria is at a high, but the fat lady has not sung. There is still a fair amount of risk.

Douglas McIntyre is a partner at 24/7 Wall St.