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Wednesday, March 24, 2010

Establish Noble Corp. Covered Calls

An additional 300 shares of Noble Corp.(NE) were purchased today, which doubles the total investment in NE to 600 shares in the Covered Calls Advisor Portfolio(CCAP). A covered calls position was established by selling the Apr2010 $41.00 call options as follows:

Established Noble Corp.(NE) Covered Calls for Apr2010:
03/24/2010 Bought 300 NE @ $40.08
03/24/2010 Sold 3 NE Apr2010 $41.00 Calls @ $.80

Noble Corporation provides contract drilling services for the oil and gas industry. It supplies its 43 jack-ups and 20 deepwater rigs to a worldwide exploration and production market for corporate and state-owned customers in the Gulf of Mexico, Brazil, Middle East, W. Africa, and India.

Noble Corp's stock is attractively priced on several key valuation metrics, including: (1) low P/E ratio relative to the past 20 years; (2) strong balance sheet with low and declining debt-to-capitalization; and a strong cash position; (3) an ongoing commitment to share buybacks; (4) strong and increasing cash flow; (5) very strong recent cost control performance. These results are a testimony to the capabilities being demonstrated by senior management. This Covered Calls Advisor believes that the decision to re-domicile to Switzerland (from the Caymans) was one important demonstration of management's good strategic vision. And in the highly cyclical oil & gas industry, their prudent, conservative approach to cost controls as well as contract management seems very sensible. With oil priced in the $80 area, rig demand continues to improve -- and Noble is well positioned to benefit from increasing capital spending by major exploration and production companies, especially in Noble's focus area of deepwater rigs.

Two possible overall performance results (including commissions) for the NE transactions would be as follows:
Stock Purchase Cost: $12,032.95
= ($40.08*300+$8.95 commission)

Net Profit:
(a) Options Income: +$228.80
= (300*$.80 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If NE price unchanged at $40.08):
-$8.95 = ($40.08-$40.08)*300 - $8.95 commissions
(c) Capital Appreciation (If NE exercised at $41.00): +$267.05
= ($41.00-$40.08)*300 - $8.95 commissions

Total Net Profit(If price unchanged at $40.08): +$219.85
= (+$228.80 +$0.00 -$8.95)
Total Net Profit(If NE exercised at $41.00): +$495.85
= (+$228.80 +$0.00 +$267.05)

Absolute Return if Unchanged at $40.08: +1.8%
= +$219.85/$12,032.95
Annualized Return If Unchanged (ARIU): +27.8%
= (+$219.85/$12,032.95)*(365/24 days)

Absolute Return if Exercised at $41.00: +4.1%
= +$495.85/$12,032.95
Annualized Return If Exercised (ARIE): +62.7%
= (+$495.85/$12,032.95)*(365/24 days)

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