NOTES ON ELI LILLY (LLY)
Collar

1. In a one month span from Nov. 18, 2002 to Dec. 18, 2002 LLY
traded from just below $60.00 to just below $70.00 and back down
to $62.00.

2. In another one month span from late May 2003 to mid-June
2003, LLY traded from $56.00 up to $72.00.

3. Several gap openings are also apparent with one in
mid-January 2003, one in late August and one in very late
September. These all point to periods of high or increasing
volatility.

4. We also want to notice the individual daily trading ranges.
The length of the lines shows the number of large range days.
The longer lines indicate larger intraday ranges. In the chart
above, LLY shows a very high number of large intraday movement
days, again pointing to high volatility.

5. As much as LLY had strong run-ups, it had some large down
periods also. In a 2 month period from mid-Jan. to mid-March
2003, LLY traded down from $68.50 to $58.00. Then in another two
month period, mid-June to mid August 2003, LLY traded down from
$71.00 to $61.00.

Conclusion: LLY appears to be a very volatile stock during the
observed period charted above. The stock began this period at
around $60.00 and finished the period at $67.00, which is not
necessarily a large move. But when we look at the large
intra-month ranges, its clear that LLY has been very volatile
during this period.

With this type of movement, a maximum protection strategy is
necessary but, with such high volatility, premiums will likely
be expensive. The outright buying of a put may cut too deeply
into potential profits making the risk reward scenario
unjustified.

The collar strategy, however, will provide the necessary
downside protection, while still allowing room for some capital
appreciation. The sale of the call will offset the cost of the
put purchase to make the trades risk/reward scenario more
viable. The collar can be leaned to provide either more
protection or more capital appreciation, depending on the
investors short term outlook.