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Friday, December 19, 2008

Establish United States Oil Fund ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of the United States Oil Fund ETF (USO).

USO is an ETF proxy for the spot price of West Texas light, sweet crude oil. The oil price has plummeted from $140+ earlier this year to below $35 now. By establishing a position in USO now, this advisor is not trying to "pick the bottom" of the oil price. Rather, it is a commitment to the proposition that oil is reasonably close to the lower end of its likely future price range and that its price is likely to move higher over the next several months. Because of the intense bearishness in its recent price, the implied volatility in the USO options have spiked up to a very high level -- this makes selling the calls (and the associated very high potential returns from this covered calls position) an especially attractive investment now.

Established United States Oil Fund ETF (USO) Covered Calls for Jan09:
12/19/08 Bought 200 USO @ $32.33
12/19/08 Sold 2 USO Jan09 $34.00 Calls @ $2.40

Annualized Return If Unchanged (ARIU): +93.3%
Annualized Return If Exercised (ARIE): +158.4%
Downside Breakeven Protection: 7.4%

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