Covered Call Expert Report

8/3/2019 Covered Call Expert Report

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Income Investing

withCovered Calls

Income Investing

withCovered Calls

The Simple Strategy that Can Yield 3% to 5%

Monthly in Both Bull and Bear MarketsWhile Limiting and Defining Risk

Free Special Report Courtesy of www.callwriter.com


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Hello,

Thank you for visiting MyCoveredCallWriter and downloading your free report!

This is about to get really exciting!

You now possess the critical information to GO FOR IT and start creating your

own paychecks; earning 3% to 5% a month from writing covered calls.

During my educational journey, I paid almost $200 buying books from Amazon and

other sites and didnt get all the information that is contained in this report! And its

yours FREE.

When I decided to publish a site about my passion, covered call writing, I started

to compile pages and pages of notes on past trades and what I learned so I could

write my own comprehensive report. It was tedious and I was looking for more

in-depth information.

It was staring me in the face!

One of the best resources I use for education and trade selection is a website called

www.callwriter.com. John Brasher, Call Writer founder and master trader, offered

me use of his special 50-page report for my subscribers. What a gift!

This concrete report tackles all the concepts and strategies delivering rock-solid information to you faster than I could have written myself. Johns site has

been up for 13 years and he and his staff are experts.

One note; as you digest this report you will notice that General Motors and Lehman

are used many times as examples. This report was written before the crash and those

stocks were bell weathers at the time. If you were writing covered calls on them

back then and used a collar trade or Johns Super Put Strategy, when these stocks

when to low and zero, you would have made a boatload of cash! There are covered

call strategies for all markets.

Welcome aboard. If you have questions, please feel free to email me [email protected]

Cheers

Tim Leary


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Here ajust afew of the things you'll learn in this Special Report: Learn what covered calls and SuperPuts are and how you can use them profitably.

Find out how covered writers can make 3% to 5% a month consistently.

See how this strategy workseven with a dropping stockand even in dropping markets.

Learn techniques to limit trade risk to a few percentof the funds invested.

Read about simple, easy-to-use strategies that generate a consistent income.

See undeniable statistical proofthat covered call writing is better than stockinvesting.

How CallWriter tools cover you all the way through the trade:Finding the highest-returning trades;

Picking the best, most conservative trades; Tools for managing your trades for maximum profit.

You'll see how different and powerful ourlegendary tools really are.

Read actualstories of ordinary people experiencing extraordinary success.

Learn why CallWriter truly is differentfrom other websites for traders.

Learn why the CallWriterMethod is one of the lowest-riskstrategies of all.

Watch us manage a covered call trade using our amazing TM Calculator.

See how you can generate wealth without relying on or paying anyone else.

Read how our methods are based only on conservative investments.

Find out why CallWriter is the world's premier covered call website.

The Simple Strategy that Can Yield 3% to 5%

Monthly in Both Bull and Bear MarketsWhile Limiting and Defining Risk

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Just kidding - broker tips don't work, since brokers are not trained stock analysts, and a surprisingnumber of them were selling cars or insurance a year ago. Worse, brokers frequently are peddling "house"stocks or have another hidden agenda. If you want to lose money very fast, buy the stocks your broker is

recommending.

Financial consultants and advisers can be knowledgeable about choosing good investments, but manyaren't. Probablymost aren't. It's not as though they have to demonstrate real investing acumen to become

licensed. The problem is that brokers and financial advisers get paid commissions when you buy the fundsand other products they recommend. They make money when you do, and they make money when youdon't. Maybe their recommendations are honest and competent, but how will you know until it's too late?

Unlike CallWriter, they certainly do not give you the data and training to pick good income -producinginvestments for yourself, manage them properly and limit your risk, if you choose.

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The returns from bank savings accounts or certificates of deposit, from U.S. Treasury notes and bills,tax-advantaged municipal bonds and similar instruments, are terribly low. Things like corporate bondspay a higher return, but offer a much lower degree of safety. What a Hobbesian choice - a safe, horriblereturn, or a slightly better but riskier return. The dollar (falling and at a 15-year low as I write) andinflation are wiping out those miniscule returns, anyway. The government's core inflation measurementdoes not include food and energy, so if it seems the old paycheck doesn't go as far as it used to, it doesn't.Bad enough dollar devaluation and price inflation steal your paycheck, but your investment returns, too?

I would never argue with anyone who believes these investments are the way to go. But they can do nomore than protect your nest egg, and that's IF the nest egg outruns inflation and the dollar fall. They willnot build wealth.

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Here's an answer that makes a lot of sense: the deck is stacked against the retail investor andtrader. Do you have the skill to pick the stocks that will gain in value in a few years, a few months, a fewdays? Few do. The good news is that about 10,000 different magazines, web sites and television pundits

all know just which stocks you should buy today. The bad news is that none of them pick the same stocks.Good luck picking the right one to follow. Do you have that rare skill to time stocks like the successful daytraders and swing traders, and can you sit in front of a computer monitor all day waiting to catch themoves?

If you haven't had consistent success with your investing, there might be several very good reasons why not. Here are a few of the most common culprits:

1. You relied on stock tips from brokers, advisers, pundits or friends. 2. You've tried a strategy that worked sometimes, but sometimes not, and lossesoverwhelmed the good trades.3. You subscribed to a p icks s er v ice , and the picks were bad, uneven or only worked in certain market environments.

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4. You keep flitting from one strategy to another, but they all produce unevenresults - or losses.

5. You've tried buy-and-hold investing and your accoun t just doesn't grow becausethe stocks didn't grow- and of cour se didn't produce income.6.

You've been to seminars that didn't help (mine do, by the way) , because t h e y

didn' t show you how to make money , and m ostly wanted to upsell you to otherp r od u cts .

7. Or maybe, just maybe, you've never deployed a strategy that can workconsistently in different mar kets, because you just didn't know there wa s one...

Let me raise my hand here and say that I have done ALL of the above, so I'm not talking theory here!But even if you are doing something that is working, consider the possibility of devoting unused corners of your account to a conservative, income-producing strategy.II tt '' ss aa ll ll aabb oo uu tt cc aa ss hh ffll ooww,, nn oo tt ii nnvvee ss tt mm ee nn tt ss aavvvvyyoo rr ss tt oo cc kk-- pp ii cc kkii nn gg ..

What do guys like Warren Buffett and Donald Trump have in common? The answer: cash flow.Business is measured by its cash flow and the quality of its earnings. Investors and the market all breathlessly await theearnings report, not the asset report or book value report. C a s h f l ow : businesslives and dies by it. Thus, how odd is it that American investors are constantly exhorted to simply buy and

hold unproductive investments - something that no captain of industry or businessman ever has done orever will do?

It really is simple. Your money should be working for you- conservatively, regularly generatingincome.

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Does the idea of using an i n c o m e i n v e s t i n g strategy to generate 3% to 5% a month on your fundsappeal to you? That's 3 6 % t o 60% annually, without any compounding of returns. Do you like the ideaof confining your investing to only high-quality, c o n s e r v a t i v e s t o c k s , the kind that competent financialadvisers would recommend if they didn't live primarily on commissions on the products they actuallyrecommend? How about using a simple strategy to limit your riskin each trade to only a few percent ofthe amount invested?

Note: According to the Chicago Board Options Exchange (CBOE), the world's largest, writing covered calls ismore conservative than just owning stocks without getting income from them - which I think of as naked stock.

Below you will see statistical proof that covered call writing outperforms a stock buy-and-hold strategy.But now let's take a look now at the covered call, a conservative income investing strategy whosepopularity is growing in leaps and bounds...



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You buy shares of stock and write (sell) call options (calls) against them. Or if you already own theshares, you can simply write calls against them. The price you get for writing the calls - the premium -goes into your pocket. When the call option expires, you simply sell the stock and keep the optionpremium. Here's how it works:

1. You bu y the stock, or already ow n it;

2. You sell call options against the stock;

3. You pocket the call premium;

4. You sell the shar es, locking in your pr ofit; then do it again!

5. If you want, you can limit risk to a few per cent of the fundsemployed.

Now, how difficult does that sound? It isn't difficult, and it is very easy to learn. The hard part, as inall investing, is to exercise patience and discipline. But first we must be clear what call options are...

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An investment in knowledge always pays the best interest.Benjamin Franklin

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Aca l l op t ion (or just "call") is a standardized contract that gives the holder the r i g h t , but not theobligation, to buy 100 shares of stock that are subject to the option (the "underlying stock") at a pre-determined price (the "exercise" or "strike" price) for a set period of time. In other words, you are sellingsomeone else the right to buy your stock.

Example: If you own shares of General Motors (GM) and write the March $35 Call against those shares, youpocket the premium from selling the calls. You also are giving the holder of those calls the right to buy yourshares of GM (known as "calling" the shares away from you) at the price of $35 through the calls' expiration date

in March. In this example, the $35 exercise price is the "strike" price.

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Every stock option has a fixed life span . If an option is not exercised before it expires, it is said toexpire wor thless. This sounds terrible, but it is a GOOD thing. When a call option expires worthless, we

are free to sell the stock or write more calls for additional income.If the calls you have sold are exercised,then you will have to sell the shares at the strike price. We refer to this as the shares being called aw aybythe purchaser.

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Writing (selling) call options produces income, but the story gets even better. According to the OCC,only11 00 %% of all option contracts are exercised. J u s t 10 % . This means that the other 90% are neverexercised. About half or bought or sold to close by hedgers, and about half expire worthless. So nearly halfof all options are bought by speculators and expire worthless. Those are lousy odds for call buyers, but

pretty good odds for the call writer! The s p ecu l a tor s are buying calls in hopes of price movement; weare simply selling them all the calls their little hearts desire.

Call Buying (Speculation) RiskPercentage of options actually exercised = 10%Percentage of options that are traded out

or expire worthless = 90% But what DOES work is to sell call options to the speculators and hedgers, who will pay whatever they

have to! In fact, the technique that works like a charm is to sell call options that offer fat premium on veryhigh-quality stocks. This generates huge returns. I talk further on about what a "high-quality" stock is,and isn't.II ffyyoo uu cc oo uu ll dd ll oo ss ee tt hh ee ss tt oo cc kk,, wwhhyyss ee ll ll cc aa ll ll ss ??

Since the call gives the holder the right to buy the stock, you could lose the stock when it is calledaway. This only happens, of course, if the call is "in the money," meaning that the stock price is higherthan the calls' strike price. Why would the owner of stock want to lose the stock? The answer is thatselling calls on the shares generates p r e m i u m i n c o m e . Besides, covered call writers mostly buy stocksand write calls against them hoping the shares will be called away- then we look for another trade

involving another high-quality stock that is offering good premium (or just keep and write the samestock). In other words, we want the stock to be called away. There are strategies, though, for covered

writers who sell calls on portfolio stocks and who don't want their shares called away.

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The answer: the large institutional money managers; pensions, mutual funds, hedge funds, and anyinstitution that holds a portfolio of stocks. It only makes sense... why would they just sit there hoping thestocks will go up when they could make the portfolio in effect pay a m o n t h l y d i v i d e n d by selling calloptions against the shares? The institutions sell more covered calls than anybody. If they're doing it, whyaren't you?

Think about it: which side should you be on... the s p ecu l a t ive side or the i n c o m e side? The buy-and-hold crowd would exhort you to buy stocks and hold them indefinitely and unproductively, but sellingcovered call options generates 3% to 5% a month in income - and you STILL OWN the stocks, if you want.

Which sounds better to you?



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Remember, in a covered call position, we buy the stock and write (sell) the call option:

Covered Call = Long Stock Short Call

Suppose we bought 100 shares of GM for $35 a share and simultaneously wrote the $35 call against

those shares for a $$ 11 .. 77 00 premium. This would bring in $$ 11 77 00 of premium ($1.70 x 100 shares). Writingthe calls lowered our cost basis in the shares to $33.30 (35.00 - 1.70), slightly reducing our risk from aprice drop. If we sell the shares for $35 or more after the calls expire, we keep the entire $1.70 in callpremium. In the normal case, we would be in this trade for 30 days or less. This $1.70 premium wouldrepresent a55 .. 11 %% return (1.70 33.30 cost) for a one-month trade.

I'm not exaggerating, a 5.1% return on your money for o n e m o n t h on a very conservative stock. Ofcourse, you can write a new covered call every single month.

Here's how the trade looks if we write an at-the-money call, meaning that the exercise price of thecalls sold is the same as the stock's price:

General Motors (GM)At-the-Mone y $35 Calls Written

Action Amount Cost Basis

Bought GM shares -$ 35.0 0 $35.00 Sold GM Dec. 3 5 Call +$ 1.70 $33.30 Sold GM shares +$ 35.00 $0 NN ee tt PP rr oo ffii tt (( 55 .. 11 %% )) ++ $$ 11 .. 77 00

That's not bad for a trade of 30 days or less! That's more than your "uncle" in Wa shington pays ininterest on T-Bills for an entire year! A 5.1% return for one month roughly equates to a 66 11 .. 22 %% annualreturn, without even compounding returns (more on that later). Now, that should get your motorrunning! This is why we write covered calls. If GM's price is above $35 when the option expires (theyexpire on the Saturday after the 3rd Friday of each month), then the stock will be called away- you willhave to sell it. But that is no problem: you simply buy it and write it again, or buy a stock you like better

and write calls on it!

Note: The price of General Motors could of course be down when the option expires, but we will see a littlefurther on how to handle that situation and profit from it.

Now let's look at a similar example in which we expect the stock to go up and we sell a higher -strikeout-of-the-money $40 call (instead of the $35 call) for a $$ 00 .. 66 55 premium, or $$ 66 55 in total premium. Thiscall write lowers our cost basis to $34.35 . If we are called out at the higher $40 strike price , our profit willbe $$ 55 .. 66 55 per share ($ 5 6 5 ) a whopping 11 66 .. 44 %% for o n e m o n t h , an eye-popping 11 99 66 .. 88 %% annualized!



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General Motors (GM)Out-of-the-Mone y $40 Calls Written

Action Amount Cost Basis

Bought GM shares -$ 35.0 0 $35.00 Sold GM Dec. 4 0 Call +$ 0 . 6 5 $34.35 Sold GM shares when called +$ 40.00 0 NN ee tt PP rr oo ffii tt (( 11 66 .. 44 %% )) ++ $$ 55 .. 66 55

Why was this return so huge? The reason is that we received the $0.65 premium when the trade was

placed, and then we made an additional profit of $5.00 per share when we sold them at the $40 exerciseprice. Had the GM shares not made the hoped-for move, we still would have pocketed the $0.65 premium

for a return of11 .. 88 99 %% ; not a great return at all, but it still annualizes to a 22 22 .. 77 %% return. A return of 1.9% amonth will still add up to a great annual return. So even when you don't do that well at covered writing, you can still do pretty darn well.

But wait a minute, what would happen if GM's price rose, but not all the way to $40? Suppose it onlyrose to $37? The answer is that the stock would not be called away (no one would exercise a call to buy itat $40 when it is trading at $37), and we could sell it at $$ 33 77 . This would still bring in an extra $200 pershare profit - total return on the trade in that case would be $$ 22 .. 66 55 , or 77 .. 77 %% (2.65 34.35 cost), which isonly99 22 .. 44 %% annualized; only!

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That will happen from time to time. Stock prices oscillate - stocks often trade in price ranges. For

example, a stock might for a long time period trade between $55 and $75. The price is less important thanthe amount of premium income it generates. A drop in stock price for a large, established company isimmaterial unless it is due to a profound change in the company's prospects. The following GeneralMotors example illustrates this dynamic. The table below shows the variations in stock price of GeneralMotors from February 2004 ($54) through mid-October 2007 ($38):

General Motors Price Analysis Swing Highs Price S w ing Low s Price

February 2004 $54 April 2005 $25July 2005 $38 December 2005 $19February 2007 $37 March, May 2007 $29June 2007 $39 October 2007 $29October 2007 $38

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Note the swings in price over 3.5 years oftrading. From the original high of $54, GM has oscillated up

and down, making numerous swing highs and lows. The decline from $54 to the very brief low of $19 tookalmost two years. GM has been somewhat volatile over time (for a blue-chip), but it's still a giant companythat due precisely to that same volatility has thrown off great premium most of the time. Take a lookat the following weekly chart of GM. Ugly, right? Not for a covered call writer:

Assume that theavera ge priceof GM during the period of February 2004 through October 2007 (42

months) was only$3 0 . It was actually closer to $35, but lets use $30 to be conservative. The next tableshows realistic assumptions of how a covered call writer would have done by writing calls every month

during this period of 42 months on GM:General Motors Premium Income AnalysisFebruar y 2004 - October 2007Avg. Pr ice Avg. Mo .

R e t ur n Avg.P r e m i u m P r e m i u m S t r e a m (x 42 mo.) 1,000 Shares $30 4% $1.20 $$5500..4400 $$5500,,440000..0000 $30 3% $0.90 $$3377..8800 $$3377,,880000..0000

If we had bought and held GM every month at an average cost of $30, while writing calls on the stock

at an average premium return of4 % per expiration month, we would have netted an average return permonth of $$ 11 .. 22 00 . That would be a total premium stream for the 42-month period of$$ 55 00 .. 44 00 (30 x 4% x42). Had we owned and written 1,000 shares, the return before commission costs would have been$$ 55 00 ,, 44 00 00 . Since we paid $54 for GM in this hypothetical example, our return was 93.3% for the entire 42 months, approximately 25% annually. This return includes no compounding of income generated, nordoes it assume buying more shares when GM was cheaper.

Even at an average of3 % per month, which is lower than actual historical premium levels, writingGM for this period would have yielded $$ 33 77 .. 88 00 per share in income, or $$ 33 77 ,, 88 00 00 on 1,000 shares. Yetactual premium levels on General Motors probably averaged closer to 5% monthly!



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GM as I write this is trading at $38. The net effect would have been to pull in over $$ 55 00 of premiumincome before trade costs, and we would still own a stock worth $38 - that still is throwing off excellentcall premium. How did we do? This is covered call writing, conservatively done. As GM's price dropped, we simply would have kept writing the shares, and if called out at a lower price, we would have bought theshares again and kept writing.

Note: This technique of writing a stock that is down for continuing income assumes that you confinecall writing to large, establishedand profitablecompanies - the best companies. Writing unprofitablecompanies should be restricted only to giant companies such as General Motors.

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No, absolutely not. In fact, the classic covered call strategy is to buy stocks of top companies that offergood levels of premium, write calls on them for income and then sell the shares. This is known as the buy-write strategy, for obvious reason. This strategy maximizes income, since its logic is to pick high -qualitystocks (those you would be willing to hold for years) that happen to offer good premium. But there isnothing wrong with holding good stocks for years and collecting a "monthly dividend" on them by writingcall options each month. That's another great thing about covered call writing - there are many strategiesto deploy, from conservative to directional. Like the burger commercial said, you can have it your way.

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Of course it is. Any time there is a chance to make money, there is risk- although mySuperPutcovered call strategy comes about as close to riskless as possible. But over a decade of writing covered callsand watching what hundreds of CallWriter members have done, it is quite clear where the losses comefrom: poor stock selection (writing small, unprofitable or overvalued companies, primarily) and in thecase where good stocks were written, from panicking over ordinary price movements- instead ofcreaming the stock for more premium.

In other words, most losses in covered call writing are need l es s and come from thinking like swingtraders instead ofincome investors.

The General Motors example above furnishes a perfect example. Many people would have panickedand sold GM shares, taking a needless loss, as the stock declined from its $54 entry point. The patient and

disciplined call writer would have realized that stocks can move around and would have reveled in thehigh levels of premium and income stream GM yielded, instead of panicking over the stock price. Keepyour trade selection frosty (I teach you how), and use patience and discipline. This will keep your accountraking in a fine income stream. We've now looked at what a covered call is and how it works to produceincome. Now let's take a look at how covered call writes do depending on how the underlying stockperforms.



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WWhhyyccoovveerreeddccaallllssaarreebbeetttteerr::(They win in 4 out of 5possible price movements.)

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If you give it a bit of thought, there are five possibilities. Many would say there are three possibilities

(down, up or flat). But it is more helpful to view it as five possibilities, which are:

1. Go up a lotin price.2. Go up slightlyin price.3. Stay about the same price.4. Go down slightlyin price.5. Go down a lotin price.

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Day trading or active-trading stocks, buying calls or puts, short selling, bullish spreads, creatingstraddles or strangles... these directional strategies win if the stock either advances or stock declines. Thestock has to move in order for the trade to produce a profit.

Strategies like credit spreads, on the other hand, win if the stockdoesn't move but can lose quickly if itdoes move. That is, most trades win in onlyONE or TW O out ofF I V E possible price actions. That's justthe way it is.

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In a properly-executed covered call writing strategy, the trade wins in 4 of the 5 possible pricemovements, as shown in the table below. Of course, an income investor using the CallWriter Method, whosticks with the best companies, doesn't worry too much about a declining stock and simply keeps raking inthe premium every month.

Wins Stockgoes up a lotin price.Wins Stockgoes up slightlyin price.Wins Stockstays about the same price.Wins Stockgoes down slightlyin price.

Loses* Stockgoes down a lotin price.* We might or might not take a loss on a stock that drops a lot. There are t echniques

to protect against loss on a dropping stock and even profit from it.



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How many trading strategies can you think of that make a 3% to 5% monthly profit even if the stockdoesn't move an inch? The straight stock buyer certainly doesn't! Option buyers and other speculatorsdon't. But covered call writers make their full expected return.

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In this case you also make the full 3% to 5% return expected, plus you can make an extra profit on thestock's move up. If you are quite bullish on a rising stock, there are ways to capitalize on the stock'smovement.

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We've had stocks drop while we were in a trade and still made a profit, because we built the traderight and the stock closed above our breakeven point! We didn't make as much as we hoped, but it wasstill a profit, which is always better than a sharp stick in the eye! And if the stock is high-quality, you canhold it and continue writing it for more profits.

Yet, why take a loss on a great stock? After all, stock prices oscillate over time, with the market, withthe industry, and on their own. Unless the fundamental quality of the company has changed, why take aloss on great company?

Better yet, mySuperPut strategy allows you to protect the trade, limiting risk to only a few percent ofthe trade funds and to eventually make the trade riskless - this makes the dropping stock someone else'sproblem.

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To be brutally honest, I can't think of a one. Almost all trading strategies either rely on the stockmoving, or in the case of certain types of option spreads, on the stock not moving. But covered calls can

win in a wide range of circumstances, because they generate income- cash flow.

That is WHY we are covered call writers in the first place. Covered call writing is not perfect; thereis no perfect strategy. But the CallWriter approach wrings high levels of income out of the best companies.And our SuperPut strategy allows the same high-income generation with very limited risk.

But I promised statistical proof about covered call writing. Here it comes -



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SSttaattiissttiiccaallPPrrooooff::CCoovveerreeddccaalllliinnccoommeeiinnvveessttiinnggppeerrffoorrmmssbbeetttteerrtthhaannbbuuyy--aanndd--hhoollddssttoocckkiinnvveessttiinngg

Writing covered calls is more conservative than just owning stock.Chicago Board Options Exchange

TT hh ee SS &&PP 55 0000 BB uuyy--WWrr ii tt ee II nn dd ee xx

In May 2002 the Chicago Board Options Exchange (CBOE), America's largest options exchange,created an index designed to track the hypothetical results of a very basic, unsophisticated covered call

writing strategy. TheCBOE S&P 500 BuyWrite Index (BXM) simulates the return that could beexpected from writing the nearest-month covered call on all the stocks in the S&P 500 stock index, goodand bad, assuming that the nearest out-of-the-money (OTM) call was written every month.

The BXM is completely mechanical in nature and designed to test the results of blanket covered -callwriting of all S&P 500stocks compared to simply buying and holding all the S&P 500 stocks during thesame period, which is good old buy-and-hold investing. In other words, if one bought and held every S&P500 stock for years and another bought the same stocks but simultaneouslyalso wrote a covered call onevery S&P 500 stock over the same period - how would each strategy do?

An s we r : over the last 15 years, covered call writing won! And it also provided far less portfoliovolatility and provided revenue even when the market was down.

Keep in mind that no attempt was made in the BXM to confine trades to stocks offering high coveredcall returns, or to avoid stocks in a downtrend or expecting life-and-death news, nor were any trademanagement strategies used. It did extremely well! Covered calls actually produced better returns in 8 of

the 15 years studied than did buy-and-hold investing. Here is a breakdown of the results:

Performance of the BMX compared to the S&P 500Percent returns by Calendar Year, 1989-1995

1989 1990 1991 1992 1993 1994 1995BXM 25.0 4.0 24.2 11.5 14.1 4.5 21.0S&P 31.7 3.1 30.5 7.6 10.1 1.3 37.6

Percent returns by Calendar Year, 1996-20031996 1997 1998 1999 2000 2001 2002 2003

BXM 15.5 26.6 18.9 21.2 7.4 -10.9 -6.7 19.4S&P 23.0 33.4 28.6 21.1 -9.1 -11.1 -22.1 28.7Source: Chicago Board Options Exchange

http://www.cboe.com/LearnCenter/pdf/bxmqrg.pdfhttp://www.cboe.com/LearnCenter/pdf/bxmqrg.pdf


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For the total 15- year period examined, the average annualized return from covered call writing was12.4% , versus 12.2% for buy-and-hold investing. That is, covered call writing beat the buy-and-holdstock investing strategy! The margin of victory was not huge, but remember: the BXM strategy duplicatedthe results of writing every S&P 500 stock, even the weak, unprofitable ones - which a covered call writernever would have done.

True, an investor would not have bought every S&P 500 stock, either. But in good years or bad, would you have bought theright stocks? And the straight investor would have had no income from them.

Take note, however, that in certain years, the S&P 500 only netted a paltry return of 3.1% (1990),7.6% ((1992) and 1.3% (1994). On the other hand, note the market returns for 2000-2002, which were --

99 .. 11 %% ,, --11 11 .. 11 %% and-22 22 .. 11 %% . Great Scott! But here's the fun part: since you cannot buy every S&P 100stock, you would not have gotten the great returns in the best years unless you bought the right stocks!

Yet a covered call writer should be making33 00 %% ++ every year, by focusing on the very best stocks withacceptable callwriting returns. Andyou get to decide what is acceptable.

On the other hand, the volat i l i ty experienced when writing covered calls is significantly lower thansimply buying stocks. The standard deviation (calculated monthly) of covered call writing over the 15

years was 99 .. 99 %% compared to 11 44 .. 77 %% for buy-and-hold investing, which means that covered call returnsshowed only t w o -t h i r d s as much volatility as buying and holding S&P 500 stocks.

WWrriittiinnggPPoorrttffoolliiooSSttoocckkssWWhhyy nn oo tt mm aa kkee yyoo uu rr ss tt oo cc kkss pp aayyaa mm oo nn tt hh llyydd iivvii dd ee nn dd ??

Stocks can laze around your portfolio while you wait for them to catch fire, if they do. Or, you canmake them pay you a monthly dividend. They may not happen to have fat premium, but even 11 %% permonth would add considerably to your returns, wouldn't it? As I've noted above, professional moneymanagers sell calls almost continuously against portfolio stocks; even getting 11 //22 %% per month would add

6% or better annually to their fund results. And they average better call writing returns than that. If thepros do it - and they do it religiously- why aren't individual stock investors doing it? Writing call optionson your portfolio forces the stocks to pay you a m o n t h l y d i v i d e n d .

DDoo nn '' tt wwaa nn tt tt oo ll oo ss ee yyoo uu rr ss tt oo cc kk??

Some investors hesitate to write calls on portfolio stocks for fear of having the stock called away. Ifyou don't want to lose the stock, there are alternatives for dealing with this problem. Don't write calls when the stock price actually is rising. Write them when the stock price is flat or falling, and buy the calls back before expiration if they are in the money(lower than the stock price), in order to avoid being calledout. If the stock is trading in a price range, write calls at the range tops as the stock begins to fall; then buythem back for a profit as the stock falls. How hard is that?

DD ii dd yyoo uu kknn oowwyyoo uu cc aa nn pp rr oo tt ee cc tt aa pp pp rr ee cc ii aa tt ee dd ss tt oo cc kk??

Sadly, investors often watch stocks actually appreciate in price they guessed right only to see thestocks fall again, either in a natural trading rhythm, or with a market decline, or with a decline in theindustry's fortunes. Yet, no one wants to sell the stock at a high. After all, it's an investment and it couldgo even higher! Actually, there is a simple technique for protecting the gain in value. Purchase a longer-termp u t o p t i o n (put), which gives you the right, but not the obligation, to se l l the stock at a fixed pricefor the puts life. Then write calls every month, or if you dont wish to be called out of the stock, write themas opportunity arises. The purpose of this technique is not so much to generate an income but to use thestream of callwriting income to pay the cost of the protective put.



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For example, if you bought stock at $36 and the stock is now $80, you could purchase an $80-strikeput with an expiration date as far out in time as 2.5 years. The put gives you the right anytime during itslife to sell the stock at $80, which guarantees you that price. But what if the stock collapses back to, say,$47, you could just sell the protective put for about a $$ 33 33 pp rr oo ffii tt ($80 put strike - $47 stock price). Theput will have gained this much in value as the stock fell (just as calls gain in value as the stock rises).Interestingly, some educators charge high prices for seminars to teach this technique, which I just gave

you. Does it make you wonder how much power is available on CallWriter? Read on

KKeeyyssttooCCaallll--WWrriittiinnggSSuucccceessss

Like any successful investing method, the CallWriter covered call method has a logical core. In fact,

consistently successful covered call writing relies most heavily on one thing: cc oo mm mm oo nn ss ee nn ss ee .

The successful investor looks for strength, and call writers are no exception. We want stocks that arestronger than the average, no matter what the market is doing. We also prefer strong industries, becauseeven a company showing strength will do better if it is in a strong industry. In every investing and tradingstrategy, there are many variables than can cause a loss. The secret to successful income investing is

figuring out which facts consistently lead to losses or problem trades and avoiding them. Thus smartincome investing is like life well-lived: avoid the bad things, seek more of the good.

That being said, what are the good and bad things? Keep in mind as we go through the basics of goodtrade selection that we are looking for strength and consistency. Covered call writing is mostly aboutstrong fundamentals, but the stock chart plays a role, as well. The chart is not sufficient justification toplace a trade, but often keeps us out of trades.

TT hh ee ffuu nn dd aa mm ee nn tt aa ll ss rr uu ll ee ..

Fundamental information (earnings, dividends, etc.) is important, and we rely heavily on it in writingcovered calls - and you should, too. The savvycall writer looks for the best stocks in the best industries inthe best sectors. We use fundamentals to choose potential candidates - meaning that no matter how great

the stock chart is, we won't write stocks with weak fundamentals; it is better to also avoid even thosestocks with just so-so fundamentals. But assuming the fundamentals meet your criteria, they don't tell youwhen to get in- or when to avoid - a stock.

TT hh ee CC hh aa rr tt :: ss tt oo cc kkpp rr ii cc ee ss aa rr ee nn oo tt rr aa nn dd oo mm ..

Many think prices are random, but I know better. Prices can be very unpredictable, certainly, but that

isn't the same thing as random. One of the world's great traders remarked a few years ago that he hadalways believed prices were random and unpredictable. But when he realized they were not random, he

became a full time trader... one of the greatest! This is good news, actually, because if prices truly wererandom, it would be almost impossible to make money in the market. Prices have no memory, but peopledo. Thus the chart plays a role in consistently successful investing. If the chart showed a stock clearlypoised on the brink of disaster, would a rational investor buy it for call writing or any other purpose? Ofcourse not. Chart analysis also will determine whether the stock should be written in the money (ITM), atthe money (ATM) or out of the money (OTM).



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6. SS ttoocc kkVVoo ll uu mm ee:: The average daily volume should be at least 1,000,000. More is better.

7. HH ii gghh OO pp eenn II nn tteerr eesstt :: Look for open interest of at least 2,500 contracts. This is the number of option contracts currentlyoutstanding.

8. NN oo mm aajj oo rr eevvee nn tt ii ss pp ee nn dd ii nn gg bb eeffoo rr ee oopp tt ii oo nn eexx pp ii rr aa tt ii oo nn .. Sometimes premium gets extremely highmuch higher than historical price volatility wouldwarrant based on major news coming. Be very careful with these. Newer traders are welladvised to avoid them.

9. TT hh ee ii nn dd uu sstt rryyii ss aa ll ssoo sstt rr oo nn gg.. Since a rising industry tide lifts most boats, strength in the industry is much to be sought.

The further the call writer gets from these criteria, the more risk at least statistically is beingundertaken. Since the covered call writing game is all about pulling fat income while avoiding losses, it is

important to stay with criteria that are geared to eliminate losses. What good are (comparatively) sky-high

returns if disastrous trades keep wiping them out? We m a x i m i z e r e t u r n s by maximizing the quality ofour trades, not by maximizing premium.

CalWriter offers many lists of large, highly conservative stocks (S&P 100, Nasdaq 100 and S&P 500stocks), which allows our members to stay focused on the best large companies and the best mid-capcompanies. But while fundamentals rule, the chart plays a role in trade selection, too. Who would choose

to stand under a falling piano? Heres how to avoid that piano

TTHH EE TTEE CC HH NN IICCAALL SS (( tt hh ee CC hh aa rr tt ))

1. TT hh ee sstt oocc kkmm uu sstt bb ee aa tt ll eeaa sstt aa ss sstt rr oo nn gg aa ss tt hh ee mm aa rr kkeett ..Whatever the market is doing, we do not want a stock weaker than the market.

2. GG oooo dd pp rr ii cc ee pp eerr ffoorr mm aa nn cc ee bbyytthh ee ii nn dd uu ssttrryy.. When the industry is performing well and price is rising (buyers coming in), even so-so stockstend to do quite well. If the industry is struggling, your stock will have to fight that weakness.

3. LL oooo kkffoorr sstt oocc kkss ii nn aa nn uu pp ttrr ee nn dd .. Even in a bear market, there are advancing issues, though not so common. But if the market isdeclining, nonetheless look for charts stronger than the market. Declining stocks should only bewritten with our SuperPut strategy.

4. TT hh ee sstt oocc kksshh oo uu ll dd nn oott bb ee tt eesstt ii nn gg oorr aa pp pp rr oo aa cc hh ii nn gg rr eess ii sstt aa nn cc ee .. When a stock hits a resistance level, the most likely result is another failure and retreat . Catch arising star, not a falling knife.

5. AArr eecc ee nn tt tteesstt ooffssuu pp pp oorr tt ii ss aa ggoo oodd tt hh ii nn gg..It is a good sign that the stock recently has tested support and is rising, whether the stock iscontinuing in an uptrend or is moving in a wide range.

6. MM aa kkee ssuu rr ee tthh aa tt mm oovveess hh aa pp pp ee nn oo nn vvoo ll uu mm ee ..Trading volumes should confirm price movements, especially reversals.



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7. MM oovvii nn gg aavveerr aa ggeess ll oogg ii cc ::The stock is above the 50-day moving average and the moving average line is rising or at leastflat (not curling down). In a declining market, it is not below the 50-day average. Sometimes the100- or 200-day average will make more sense, depending on various factors.

8. TT hh ee hh ii gghh llyyvvoo ll aa tt ii ll ee sstt oocc kk..

Stocks that show high volatility, such as gaps up an down and frequent wide-ranging days, arenot good call-writing candidates.

9. HH ii gghh RRee ll aa tt iivvee SS tt rr ee nn ggtt hh bb uu tt oo nn llyyii ffffuu nn dd aa mm ee nn tt aa ll ss aa rr ee ggrr eeaa tt ..Relative Strength (RS) is a measure of how the stock performs compared to an index. High RScan be a good thing if fundamentals are great and valuation is not too high.

10. BB ee wwaa rryyooffpp rr ii cc ee sspp ii kkeess..Many times a stock will spike far above support, frequently on news or anticipation. These spikesfrequently pull back, so dont write than until the stock has clearly established that it is nowtrading at the new, high price level.

Some might think this set of criteria is too selective. But they work. It only takes seconds to view achart, and not doing so means ignoring key data that can keep you out of bad trades. Granted, if you writea great company, you are not as concerned about a price decline, but conservative covered call writersdont go looking for the "falling piano" trades.

EEAARRNN IINN GG SS ::

You must be careful if earnings will be reported before expiration. If the stock has run up in price onanticipation, it might sell off, no matter what earnings are. And if negative guidance is issued for futurequarters, good earnings for this quarter will be ignored as the stock sells off (and lowered guidance dimsthe fundamental quality of the company). Look for earnings preannouncements to see if the company hashinted good news is coming. Also look back at a couple of years worth of charts and see how the stock

typically reacts at earnings.

Safest bet: a great company growing earnings consistently, and its industry is strong.

NNEEWWSS ::

When premium is sky-high, it is important to look for news, since something is driving premium sohigh. High implied volatility (the amount of potential price volatility that the option premiums imply)

indicates either that the stock is highly volatile or that the market expects coming stock price volatility.Wouldn't you want to know what's up?

Be especially wary of a pharmaceutical orbiotechnologycompany. On these, it is imperative to checkfor pending news. These types of companies can suffer catastrophic sell-offs on bad news, such as failureto get FDA approval or poor clinical trials results.



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TThh ee WWrr aa pp --uu pp ::

Some believe that this process is too cumbersome, too slow, too much. But our members have hadgreat success with it over quite a few years, in every kind of market. And it does an exquisite job ofkeeping you out of bad trades and troubled trades. Just eliminating the small, flaky stocks will in and of

itself remove a third or more of troubled trades!

With a bit of experience, the process and time involved can be cut considerably short. One sterlingCallWriter advantage is the fact that much of the needed fundamental information can be eyeballed right

on the CallWriter lists themselves. But with just a bit of practice, you will develop the ability to ruthlesslyand quickly winnow through lists of trades, discarding the pretenders and time-wasters, and focusing onthe ones that matter the quality, conservative trades.

In fact, CallWriter makes it easy and fast to research this information, because all the information youneed to make fundamental and technical assessments on the stock are integrated into our famedRes ea r ch P a ge , which opens right from the Real Time ListsTM.

**

**

**

I also promised to show you how to invest with covered calls while covering your backside (downsiderisk), limiting the total risk in the trade no matter what happens to 10% or less; sometimes much less.

Get ready to meet a major CallWriter innovation in the art and science of income investing withcovered call writing: the SS uu pp ee rr PP uu tt trade.

TThheeCCaallllWWrriitteerrSSuuppeerrPPuuttCallWriter's family ofSS uu pp ee rr PP uu tt lists presents something newin covered call lists: covered call trade

candidates with a long-dated protective put added to protect the stock's downside. Th ebuy-write coveredcall trade is built like this:

CCoovveerreeddCCaallll == LLoonnggSSttoocckkSShhoorrttCCaallll

WWhh aa tt ii ss aa SS uu pp ee rr PP uu tt ??

Because the covered call involves a long stock position, the danger posed to the writer is a sell-off inthe stock. The best protective measure to define and limit risk in a covered call trade is tobuy a long -term protective put when the trade is placed (known as a marr ied put when the put is bought atinception), which I refer to as a SuperPut trade. The SuperPut position looks like this:

CCoovveerreeddCCaallll == LLoonnggSSttoocckkSShhoorrttCCaallll++LLoonnggPPuutt

Recall that a put option gives the right but not the obligation, to sell the stock at a fixed price for a

specified period of time. Thus even if the stock price collapses, the call writer who has purchased aprotective put will be able, for the life of the put, to sell the stock at the put's strike price. In the CallWriter

SuperPut trade, the long puts shown on the list will have an expiration that is six to eight months out intime and the puts are extremely chea p in comparison to current-month call premium.

Why do I call it the Super Put ? Because the trade involves a long put that does a super job ofprotecting the underlying stock against a sell-off. These trades really are SuperPuts. We also refer to themas Protected Buy-Write (PBW) trades.



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AASS aa mm pp ll ee SS uu pp ee rr PP uu tt TT rr aa dd ee

Our goal in the following illustrative LL ee hh mm aa nn BB rr oo ss .. HH oo ll dd ii nn gg ss (( LL EE HH )) SuperPut trade is to generatea good income stream from the sequential writing of calls, month after month, after recouping the putcost. LEH has been volatile heretofore, as have all the big brokers in the summer of 2007. This volatility islikely to continue, due to concerns that the brokers will suffer major asset write-downs and hits to income

as the housing market dries up sales of financial products, among other woes. The continuing volatilitymeans that 1) premium is likely to stay high, and 2) movement in the stock price will create opportunitiesto trade the calls for additional profit. This trade appeared on CallWriter's SuperPut lists.

While we cannot know what the stream of call premium will be, we have fixed put protection costgoing in. Using actual LEH option prices, we can construct a potential SuperPut trade of eight months'maximum duration and examine it closely for income potential. The projections of$2.00 per month incall premium are just that - projections - but the table below assumes a conservative level of call premiumfor succeeding months. There is good reason to think that high premium levels will continue in brokerssuch as LEH for some time, until the problems besetting them resolve.

PP uu tt tt ii nn gg oo nn tt hh ee TT rr aa dd ee

In the following SuperPut trade example from early September 2007, we assume a buy of LEH at$54.83, selling the current at-the-money SEP $55 Call for $$ 33 .. 22 00 in premium (all time value), and forprotection buying the Apr-08 $55 Put for $$ 66 .. 77 00 . The Apr-08 55 Put guarantees that, for the life of theput, we will never sell the stock for less than $55, no matter what happens! And the put is a bargain,because we get eight months of protection at $55 and it only costs us $6.70, or $$ 00 .. 88 33 per month.

The trade costs $$ 55 88 .. 33 33 per share to put on (54.83 - 3.20 + 6.70), or $29,165 for 500 shares.

SSuuppeerrPPuuttTTrraaddeeEExxaammppllee--LLEEHHMonths (1) (2) (3) (4) (5) (6) (7) (8)

L eh m a n B r o s .LEH = $54.83 SEP55 Call OCT55 Call NOV55 Call DEC55 Call JAN55 Call FEB55 Call MAR55 Call APR55 CallBuy stock 54.83Write call options 3.20 2.00 2.00 2.00 2.00 2.00 2.00 2.00

Buy Jan-08 Put 6.70

Net Debit 58.33 56.33 54.33 52.33 50.33 48.33 46.33 44.33Return on OriginalTrade Debit (58.33)

5.5% 8.9% 12.3% 15.8% 19.2% 22.6% 26.1% 29.5%

Maximum Risk -- 33..3333 -- 11..3333 ++00..6677 ++22..6677 ++44..6677 ++66..6677 ++88..6677 ++1100..6677

Notice first of all that the 8-month protective put costs barely more than twice the amount of current-

month premium received. While anyone can buy a long-term put to protect a covered call trade, our listsof SuperPut trades only find those with good call returns and extremely cheap long-term puts!

We could have written the OTM SEP 60 Calls for a $1.30 premium instead of the ATM 55 Calls for$3.20. Doing so would have produced far less premium income, though it would have produced a hugeadditional profit of $5.00 per share if the stock were called out. But this is your choice to make; you get todecide how much premium to pull in and how much upside you want in the position.



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SS uu pp ee rr PP uu tt II nn cc oo mm ee SS tt rr ee aa mm

This trade pulls in a total call premium income stream of$17.20 ($8,600), and after recouping the$6.70 put cost, the net premium income stream for the eight months is $10.50 ($5,250.00 ) . That is aclear profit of18 % for eight months; a 2 7 % annualized return. And 5.7% ($3.33) was the maximumpossible loss on trade entry from the stock tanking. In order to be conservative, the LEH example assumes

an average premium level of $2.00 per month. A higher level of premium would of course increase thereturn nicely. A simple covered call with no put added would have produced greater returns, since we would have the cost of buying the put, but would not have protected the downside risk.

Note: The LEH table does not include any profits from assumed trading the calls or uponassignment. With a volatile stock the returns could be far greater than assumed in the LEH tableabove. However, it is important to see how the trade works in conception.

Note what the SuperPut trade construction accomplished:

GG ee nn ee rr aa tt ee dd aa ffii nn ee ii nn cc oo mm ee ss tt rr ee aa mm ffrr oo mm wwrr ii tt ii nn gg cc aa ll ll ss ;; LL ii mm ii tt ee dd tt oo tt aa ll rr ii ss kktt oo oo nn ll yy 55 .. 77 %% oo fftt hh ee aa mm oo uu nn tt ii nn vvee ss tt ee dd ;; MM aa dd ee aa ffaa ll ll ii nn ss tt oo cc kkpp rr ii cc ee ss oo mm ee oo nn ee ee ll ss ee ss pp rr oo bb ll ee mm ;; PP oo ss ii tt ii oo nn ee dd uu ss tt oo kkee ee pp gg ee nn ee rr aa tt ii nn gg pp rr ee mm ii uu mm ii nn cc oo mm ee nn oo mm aa tt tt ee rr tt hh ee ss tt oo cc kkpp rr ii cc ee ..

MMaa xx ii mm uu mm RRii ss kk

Note in the above LEH trade how, in the third month of the trade, the position becomes riskless as toany downside price move and goes into guaranteed profit. The long put limits our risk, because for theeight-month life of the put, we can sell the LEH stock at $55. But notice that the risk soon goes to zero. Atthe time of trade entry our maximum risk- the largest amount we can lose even if the stock goes to zero -

is $$ 33 .. 33 33 , or $1,665.00. The second month's call write for an assumed $2.00 l o w e r s the maximumpossible loss to $$ 11 .. 33 33 , or $665 on 500 shares. The third call write at $2.00 makes the trade r iskless against a downside stock move. Wouldn't it be lov-er-ly to have your risk limited like this?

AAddvvaa nn tt aa gg ee ss oo fftt hh ee SS uu pp ee rr PP uu tt TT rr aa dd ee

11 .. CC aa ll ll --WWrr ii tt ii nn gg II nn cc oo mm ee::

Write calls for income, month in and month out.

22 .. CC aa ll ll --TT rr aa dd ii nn gg II nn cc oo mm ee::

Buy calls back as the stock falls, pocketing extra profit, sell them again as it moves up.

33 .. TT hh ee SS tt oo cc kkii ss PP rr oott eecc tt eedd ::

Isnt this what every investor wants, protection against a sell-off?

44.. WWee SS hh oowwYYoo uu OO nn llyytthh ee CC hh eeaa pp PP uu tt ss::

The put is usually 1.5 to 2.5 times the current-month call premium, and only we have them.

55 .. RRii sskkii ss SS ttrr ii cc tt llyyLL ii mm ii tteedd ::

The maximum SuperPut risk will always be 10%, and often much less.



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66 .. KKnn oowwtt hh ee MM aa xx ii mm uu mm RRii sskkGG oo ii nn gg II nn ::

Isnt it nice to know the worst case right from the beginning?

77 .. GG rr eeaa tt ii nn FF ll aa tt aa nn dd EEvvee nn BB eeaa rr MM aa rr kkeettss::

When regular investing holds, income investing with covered calls shines all the brighter. Thisstrategy is the perfect bear medicine.

88 .. GG rr eeaa tt oo nn VVoo ll aa tt ii ll ee SS tt oocc kkss::

Volatile stocks are not conservative choices for covered calls, but you can use them with theSuperPut strategy. Those who like to trade especially like these.

99 .. TT uu rr nn ss tt hh ee DDoowwnn ss ii dd ee RRii sskkii nn tt oo SS oo mm eeoo nn ee EE ll ssee '' ss PP rr oobb ll eemm ::

Wouldnt it be great to know that a catastrophic stock collapse isnt your problem?

11 00.. TT hh ee TT rr aa dd ee SS oooo nn BB eecc oo mm eess RRii sskkll eessss::

Once the cost of the protective put is recouped, every dime of premium is pure profit andthere is no longer any exposure to a price collapse.

PP ee ee rr ll ee ss ss BBee aa rr MMee dd ii cc ii nn ee

Is the SuperPut the perfect trade? No, there is no such thing. But it allows regular income generationfree of fear that the stock will collapse. It also means that you can write covered calls with iimm ppuu nn ii ttyy in abear market, because a stock declining with the market is nn oo ll oo nn gg ee rr yyoo uu rr pp rr oo bb ll ee mm it's a problem forsomeone else, who sold those protective puts that you so wisely bought.

And the lists of SuperPut trades are only available from CallWriter , the leading innovator of

covered-call products.

RReeaallDDiivviiddeennddssWriting calls on high-quality companies is much like forcing the stocks to pay a monthly dividend.

However, great companies pay real cash dividends, which realistically can range from 11 .. 55 %% to 55 %% annually. This may not sound like much, but when stocks are held for the requisite period under the taxlaws, dividends are taxable - as I write this - at a tax rate of only 15%. Holding stocks for months, as in ourSuperPut strategy, can result in extra, tax-advantaged returns from dividends on your stocks.

http://www.callwriter.com/cgi-bin/cw/mtrack.cgi?affiliates&mycovcall&sales/MYCC/specialpricinghttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?affiliates&mycovcall&sales/MYCC/specialpricing


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CCoommppoouunnddiinnggYYoouurrPPrrooffiittss

Compounding is mankind's greatest invention because it allows for the reliable,systematic accumulation of wealth.Albert Einstein

The key to building wealth with covered call writing is the consistent generation of income in a highly

conservative manner. Many people trade covered calls full time and live off the premium stream. Butthose who prefer to build wealth can do so quickly byc o m p o u n d i n g meaning to take the net investingincome stream and turn it into new trades.

As the premium stream rolls in every month, it canbe put into other trades. The LEH SuperPut tableabove makes no attempt to show the result from compounding premium income by placing it into newSuperPut trades. Bankers refer to it as "turning" capital. As payments come in on loans, bankers lend themoney out again right away, turning it into new loans for more returns. Compounding is important,

because it keeps your money working with maximum efficiency. The great banking fortunes of historywere built precisely on turning money. The table below shows the results of achieving a consistent return

of33 %% monthly and compounding the returns. Column (1 ) assumes no tax is paid on income, as in a tax-advantaged account as an IRA, and column (2) shows the results if paying income tax of 30%:

TTaabbllee11::CCoovveerreeddCCaallllWWrriittiinnggAAnn nn uu aa ll CC oo mm pp oo uu nn dd ii nn gg TTaabb ll ee ss 33%% MM oo nn tthh llyy

Start with only$25,000 Start with only$50,000 (1) (2) (1) (2)

IRA No Tax 30% Inc. Tax IRA No Tax 30% Inc. Tax

1 35,644.02 32,450.82 71,288.04 64,901.64

2 50,819.85 46,267.10 101,639.70 92,534.203 72,456.96 65,965.83 144,913.92 131,931.66

4 103,306.30 94,051.50 206,612.60 188,103.00

5 147,290.08 134,094.08 294,580.16 268,188.16

6 210,000.43 191,187.33 420,000.86 382,374.66

7 299,410.40 272,587.41 598,820.80 545,174.82

8 426,887.64 388,644.47 853,775.28 777,288.94

9 608,639.70 554,114.08 1,217,279.40 1,108,228.16

10 886677,,777744..6688 779900,,003344..1188 11,,773355,,554499..3366 11,,558800,,006688..3366

Wow! Imagine being able, in only 10 years, to turn $25,000 into nearly $900,000, or $50,000 intoover $1.7 million! But that is the power of consistent compounding.

While the results in Table 1 above assume that you only started with either $25,000 or $50,000,many people put far more money into covered call writing. Also, Table 1 above assumes only an averagereturn of 3% monthly, and many CallWriter members do far better than this over time.



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If we run the trade exactly at market prices, we would pay a net of$18.50 per share (19.75 1.25).The best way to enter the order, therefore, is to place it as a nn ee tt dd ee bb ii tt oo rr dd ee rr . This is a type of limit order,meaning that we are instructing the broker that the net debit amount specified is the most we will pay toplace the trade our price limit. If we place the order for 500 shares (5 contracts), our maximum debit toenter the position will be $9,250 (500 x 18.50).

BB uuyy--WWrr ii tt ee OO rr dd ee rr --CC SS CC OO OO pp ee nn ii nn gg Buy CSCO shares

No. of Shares 500

Asked Price: 19.75

Sell to Open: CYQED May 20 C

No. of Contracts: 5 (500 shares)

Bid Price: 1.25

Net Debit Quoted: 1188..5500Order Type: Net Debit

Duration: Day

We might be able to do even better than this. So why not try entering the order at $18.45 or even

$18.40 in order to pay a little less? After all, those nickels and dimes add up. Now lets use the order formto place the trade, using an order entry form specifically designed for covered call trades, which manyonline brokers (e.g., optionsXpress.com) now offer. We will place the order at $18.40 instead of $18.50,and well enter the order as a day order, meaning that it is only good for the same day it is placed:

Covered Call Trade Order Form OPENING the Trade

SSttoocckkSSyymmbbooll AAcctt iioonn QQuuaannttiittyy

[ CSCO ][x] Buy[ ] Sell

[ 500 ]

OOpptt iioonnSSyymmbbooll AAcctt iioonn QQuuaannttiittyy

[ CYQED ][x] Sell to Open

[ ] Buy to Close[ 5 ]

PPrriiccee [ ] Market

[ ] Limit Net Credit [$ ][x] Limit Net Debit [$ 18.40 ]

DDuurraattiioonn[x] Day Order

[ ] Good Until Canceled

AAddvvaanncceeddOOrrddeerrss [x] None

[ ] Contingent Order

Notice that our orderbalances: we specified a buy of 500 shares and sold 5 call contracts. We

specified a net debit limit of $18.40. We sold the call contracts to open; if we owned the call contracts andwere selling them, an order would be placed to sell them to close. Once the order is filled (executed), wewill be long the CSCO stock, and short the CSCO May-$20 Calls. Assuming the order is filled, our total netdebit in the position is $$ 99 ,, 22 00 00 (500 x 18.40), which saved us $50 compared to a fill at $18.50.



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CC ll oo ss ii nn gg tt hh ee TT rr aa dd ee EEaa rr llyy

Now lets assume that we have been in the CSCO trade a few days and it has become possible to closethe trade early at a profit a common occurrence in covered call writing. To close the trade, we buy back(close) the short calls the ones we sold- and sell the stock: just the opposite of trade entry. We can sellthe stock for $19.85, and it will cost $0.65 to repurchase the calls: far less than we received when we sold

them. This time, though, we enter the limit order as a nn ee tt cc rr ee dd ii tt oo rr dd ee rr , which specifies the minimumamount (the credit) we will accept. If we enter an order at market prices, we would place the net creditamount as $$ 11 99 .. 22 00 , but a higher amount can be entered:

BB uuyy--WWrr ii ttee OO rr dd ee rr --CC SS CC OO CC LL OO SS II NN GG Sell CSCO shares

No. of Shares 500

Bid Price: 19.85

Buy to Close: CYQED May 20 C

No. of Contracts: 5 (500 shares)

Asked Price: 0.65

Net Credit Quoted: 1199..2200Order Type: Net Credit

Duration: Day

In order to pick up a little extra on the trade, lets enter it at $$ 11 99 .. 22 55 instead of $19.20. Remember thatour debit in this hypothetical trade is $$ 11 88 .. 44 00 , so our final profit will be that amount subtracted from thenet credit we receive. We specify in the order form that we are selling the 500 shares andbuying backthecall contracts to close, and we enter the $$ 11 99 .. 22 55 credit amount; we enter the trade as a day order again.

Covered Call Trade Order Form CLOSING the Trad e

SSttoocckkSSyymmbbooll AAcctt iioonn QQuuaannttiittyy

[ CSCO ] [ ] Buy[x] Sell

[ 500 ]

OOpptt iioonnSSyymmbbooll AAcctt iioonn QQuuaannttiittyy

[ CYQED ][ ] Sell to Open[x] Buy to Close

[ 5 ]

PPrriiccee [ ] Market[x] Limit Net Credit [$ 19.25 ]

[ ] Limit Net Debit [$ ]

DDuurraattiioonn[x] Day Order

[ ] Good Until Canceled

AAddvvaanncceeddOOrrddeerrss [x] None

[ ] Contingent Order



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SSmmaarrtt MMoonneeyy MMaannaaggeemmeenntt

All investors, covered call writers included, must practice good money management. The first line ofmoney management is to invest conservatively. Trade selection is about 77 00 %% , perhaps more, of the entire

covered call writing game. It's that important. Garbage in, garbage out.

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First, determine the total cash to be deployed for investing, whether in covered calls, bonds,Treasuries, bank deposits and such. Then determine the amount to be allocated to covered callwriting. There are no guidelines for this, and only you can decide what percentage it must be.

Then decide on allocation per trade: this will be your maximum trade size. The per-tradedollar allocation determines the number of trades you can buy and write against in eachposition. Where you are only allocating for a few trades, the more conservative and liquid thestock must be. I personally find more than 10 covered call trades at a time unmanageable.

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Watch commission costs and don't overtrade, especially with low number of contracts. Besure to use an online discount broker, because the more expensive brokers give nobetterexecution. Especially where commissions are high, run at least 3 contracts (300 shares) pertrade; get the commission costs per contract down. For this reason, many investors with smalleraccounts use the no-frills brokers like TradeKing and Interactive Brokers, which charge muchlower commissions, but also offer little in the way of services and tools compared to the morefully-featured sites like optionsXpress.com.

As noted above, use net debit and net credit orders to get better fills, and always try to pick

an extra nickel or dime at least out of the trades. They add up! On the other hand, if you arehaving trouble getting orders filled, they are obviously too fat. Regarding market orders, onlyuse them for a hasty exit out of a dangerous position, because they will pick your pocket.

MMaa nn aa gg ii nn gg RRii ss kk

In case I have not said it enough, use conservative stock selection procedures. Diversify intodifferent sectors to reduce your exposure to a sector that goes into rotation (sells off). Plan eachtrade to take advantage of what the stock is showing you. For example, don't write an out-of-th e-money call unless bullish on the stock. Always write the current-month or next-month calls inorder to maximize premium income per month, unless you have a strong reason for writing alonger-term call.

Pay attention and manage trades advantageously, but don't day-trade options. If you areunable to monitor the trade (on safari, whatever), either close the trade or buy a protective put.Speaking of which don't hesitate to buy a protective put when stock begins to slide. It's betterto buy a multi-month protective put than to figure out how to repair a trade gone wrong.

MMoo rr ee II nn ffoo ::

Read the CallWriter Story, and see how it came to be. Also, FAQ answered here .

http://www.callwriter.com/cgi-bin/cw/mtrack.cgi?cwstory&mycovcall&callwriterstoryhttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?cwstory&mycovcall&callwriterstoryhttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?cwfaq&mycovcall&coveredcallfaqhttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?cwfaq&mycovcall&coveredcallfaqhttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?cwstory&mycovcall&callwriterstory


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CCaallllWWrriitteerrssRReeaallTTiimmeeLLiissttssTTMM

CallWriter is famed as one of the and we think THE premier websites for covered call writers,due primarily to our wonderful lists of the highest-returning covered call trades, the Real Time Lists TM.

These great lists, conveniently divided by price, quality, call strike-price and other parameters, are thestandard for quality and usefulness. You will find nearly 3,000 trades on our lists at any one time.

Our lists are created by our exclusive PP rr oo ffii tt EE nn gg ii nn ee TT MM software, which continuously looks forthe highest-returning trades and calculates returns on them. Our lists update all through the trading day,giving you constant access to the best trades. Great covered call writing begins with the highest returns, soCallWriters lists are the place to start. We offer other gold-standard tools, of course, but we are justlyfamed for our wonderful lists. All our lists areweb-based , so there's no software to download!

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NNaakkeeddPPuuttLLiissttss SSuuppeerrPPuuttLLiissttss

Some of our lists feature large, high-quality stocks, such as those comprising the S&P 100, S&P

500 and Nasdaq 100 indices. Here is an illustration of our $20 to $40 Stock returns:

http://www.callwriter.com/cgi-bin/cw/mtrack.cgi?realtimelists&mycovcall&coveredcallrealtimelistshttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?realtimelists&mycovcall&coveredcallrealtimelistshttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?realtimelists&mycovcall&coveredcallrealtimelistshttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?realtimelists&mycovcall&coveredcallrealtimelists


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The Real Time Covered Call ListsTM provide the following information on each trade at a glance, allprices given as of the time the list was generated:

Stock name, symbol and price C a l l s y m b o l Cal l s tr ik e used to calculate the returns C a l l p r e m i u m (at the time our list was generated) for each return presented F l a t r e tu r n (the return if the stock price does not change) If -ca l l ed r e tu r n (the return if the stock is called away) N et d ebi t (the trade's net cost, or breakeven) Percentage of downside protection the premium provides O p en inter es t of the call series (the number of contracts outstanding) P/E Ratio (stock price to earnings ratio Average daily stock volume ADV, our proprietary volume momentum indicator M A D I (moving average directional indicator), a moving average oscillator which shows the 14-

and 50-day simple moving averages in relation to the current stock price

I n d u s t r y - the industry in which the company operates

This presents much of the data that a conservative covered call writer needs in order to size up atrade. And what is not presented here is presented in our proprietary Research Page, discussed later.

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Conservative? Our three index lists represent a galaxy of some of the largest, most establishedcompanies in the world. While not every company on these lists is necessarily a good covered write,they are the place the conservative writer begins. Our ETF lists present returns from exchange-tradedfunds, each of which tracks a specific industry.

Top 30SS&&PP110000((OOEEXX))5 Expiration Months

The S&P 100 includes some of the strongest, most stable companieson earth - and some of the lowest historical volatilities. Theirpremiums are not always as high as plays on the other lists, butthey tend to be less volatile.

Top 30

SS&&PP550000((SSPPXX))5 Expiration Months

The S&P 500 is a leading indicator of U.S. equities, designed toreflect the risk/return characteristics of the large-cap stockuniverse. The average 500 company is smaller and slightly morevolatile than the average S&P 100 company, but tends to offerhigher premiums. Returns often are comparable to the Nasdaq 100.

Top 30

NNaassddaaqq1100005 Expiration Months

These are the largest domestic and international non-financialcompanies listed on Nasdaq, based on market capitalization. Moretechnology-oriented and frequently more volatile than the S&P 100,they tend to offer higher premiums. These are more conservative

writes than smaller Nasdaq-listed companies.

Top 30

EExxcchhaannggee--TTrraaddeeddFFuunnddss5 Expiration Months

Exchange-Traded Funds (ETFs) are the so-called "tracking stocks"that track market and sector indices, such as the QQQQ (Nasdaq100) and Diamonds (Dow Jones Industrial Averages). While theirvolatility can be lower than for individual stocks, returns tend to besignificantly lower than options on individual stocks. They also are agood source for bear call and bull put spreads.



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Our High Returns lists present covered call trades in Pharmaceuticals/Biotechnology and in low-volumestocks. Historical volatility can be but is not always high.

Top 30

PPhhaarrmmaacceeuuttiiccaallss5 Expiration Months

These lists present only stocks in the biotechnology and drugindustries, including biotechnology, drug delivery, diagnosticsubstances, drugs and major drugs. Caution is advisable when thecompany is facing major news such as an FDA ruling or clinicaltrials results, but the plays on this list do quite well as a whole.

Top 30

LLooww VVoolluummee5 Expiration Months

These are stocks in which there is either low average daily stockvolume or low open interest in the call contracts, thus they tend tobe smaller, less-conservative companies. The historical volatility ofstocks on this list can be high. While good plays can be found here,approach them with caution.

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Our All Markets lists are divided by stock price, which is a considerable time saver for call writers

looking for trades in a particular price range.

Top 30

$$4400aannddUUpp5 Expiration Months

Stocks $40 and up from all U.S. stock markets. These frequentlyare larger and better known companies.

Top 30$$2200ttoo$$44005 Expiration Months

Stocks priced at $20 to $40 from all U.S. stock markets. These tendto be some of our members favorite lists, since the stocks are moreaffordable.

Top 30

$$1100ttoo$$22005 Expiration Months

Stocks priced at $10 to $20 from all U.S. stock markets. This list isalso highly popular with CallWriter members, due to lower stockprices.

Top 30

UUnnddeerr$$11005 Expiration Months

Stocks under $10 from all U.S. stock markets. Sometimes morevolatile than higher-priced stocks, these lists remain popular due tothe low prices, which allow traders with smaller accounts to get inthe game.



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Our Deep Strikes lists present covered call trades that are deeply (10%) in the money (strike is lowerthan stock price) or out of the money (strike price is higher than the stock).

Top 30

DDeeeeppiinntthheeMMoonneeyy5 Expiration Months

These lists present only returns on calls that are at least 10% in themoney (lower than the stock's price). These stocks frequently offerenough downside protection that they can be written even in adropping market. And yes, we actually do that.

Top 30

DDeeeeppoouuttoofftthheeMMoonneeyy5 Expiration Months

These lists present only returns on calls that are at least 10% outof the money (higher than the stock's price). These stocks aregreat for writing in an uptrending market or on stocks that arebouncing off support. Our members also use them for naked callsand bear call (credit) spreads.

Top 30PPhhaarrmmaacceeuuttiiccaallDDeeeeppiinnoorroouuttoofftthheeMMoonneeyy5 Expiration Months

These lists provide only returns that are deeply (at least 10%) in or out of the money on biotechnology and pharmaceutical stocks. Theabove comments regarding our Pharmaceuticals lists likewise applyto these deep in and out of the money specialty lists.

Top 30

LLooww VVoolluummeeDDeeeeppiinnoorroouuttoofftthheeMMoonneeyy5 Expiration Months

These lists are the deep-in and -out of the money version of theLow Volume lists. They provide only returns that are deeply (atleast 10%) in or out of the money on stocks in which there is eitherlow average daily stock volume or in which the open interest in thecall contracts is quite low. The comments on the Low Volume listslikewise apply to these.

But as many trades as can be found on our covered call lists, this is only the beginning of the tradesthat CallWriter shows you every minute of every trading day.

We also offer lists of Naked Put trades for those who want to add a little spice to their trading, whodont want to incur the cost of buying the stock. Finally, we offer our amazing new SuperPut lists, whichare not only proprietary but absolutely unique in the covered call industry!

NN aa kkee dd PP uu tt LL ii ss tt ss

In what may be an industry first, CallWriter presents several very powerful lists of Naked Put Lists,featuring the highest-returning naked put trades. Naked puts involve the sale of a put, and they are sold

when you believe the stock will hold its price or advance. Investors also use them to buy stockaa tt aa dd ii ss cc oo uu nn tt , since the put premium received lowers the cost of the stock!

http://www.callwriter.com/cgi-bin/cw/mtrack.cgi?nakedput&mycovcall&nplistdemohttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?nakedput&mycovcall&nplistdemohttp://www.callwriter.com/cgi-bin/cw/mtrack.cgi?nakedput&mycovcall&nplistdemo


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The following illustration shows the top 10 plays on CallWriters August 2007 OTM (out of the money)Naked Put list:

The Real Time Naked Put Lists provide prices as of the time the lists were generated include the

information noted below:

Stock name, symbol and price P u t s y m b o l P u t s t r ike P u t p r e m i u m F l a t r e tu r n (the return if the stock price does not change) Return Not Assigned (assumes the put writer is not assigned) M a x i m u m r i s k (put strike less put premium) O p en inter es t of the put series (the number of contracts outstanding) P/E Ratio (stock price to earnings ratio Average daily stock volume ADV, our proprietary volume momentum indicat o r M A D I (moving average directional indicator), a moving average oscillator which shows the 14-

and 50-day simple moving averages in relation to the current stock price I n d u s t r y - the industry in which the company operates

OO tt hh ee rr UU ss ee ss ffoo rr NN aa kkee dd PP uu tt LL ii ss tt ss

As I already mentioned, many people sell naked puts in hopes of buying the stock, because the putpremium received lowers the cost of the stock purchased. Writing naked puts allows you to buy stock at adiscount. People also use our Naked Put lists to find great bull put and bear put spread trades. By clickingopen our Research Page, you can quickly look at put spreads in a trice.



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Following is a description of our Naked Put Real Time ListsTM:

NNNaaakkkeeeddd PPPuuutttLLLiiissstttsssPresented due to subscriber demand, these lists present the highest-returning naked put writes. Returncalculations assume that the put write will be fully cash-secured, but do not include any accountinterest paid on funds that secure the trade.

Top 90

SS&&PP1100002 Expiration Months

Naked put premiums on stocks comprising the S&P 100 index(OEX).

Top 90

SS&&PP5500002 Expiration Months

Naked put premiums on stocks comprising the S&P 500 index(SPX).

Top 90

NNaassddaaqq1100002 Expiration Months

Naked put premiums on stocks comprising the Nasdaq 100 index.

Top 90

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2 Expiration MonthsNaked put premiums on puts that are close to the money and may

be slightly ITM or OTM.

Top 90

OOTTMMPPuuttss2 Expiration Months Naked put premiums on puts that are at least 5% out of the money.

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In what is definitely an industry first, CallWriter presents several very powerful lists of

SS uu pp ee rr PP uu tt trades that feature high covered call returns, each coupled with a very inexpensive long-termprotective put with an expiration date 6 to 8 months out in time. The protective put, as described above,allows you to pull in a stream of call premium, while the extremely cheap long put protects the stocks

downside (your backside). Following is an illustration of our OTM SuperPut list from August 2007:



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The SuperPut list shows the net debit to create the trade and shows the returns from the covered call

write, both not called and called. Uniquely, they also present the risk from both a downside and upsidemove in the

Documents

Covered Call Expert Report