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Thursday, July 21, 2011

Closed -- Caterpillar Inc. Weekly 100% Cash-Secured Put Options Short Position

With this CAT weekly options expiration being tomorrow, and also with CAT scheduled to report quarterly earnings prior to the market open tomorrow, the Covered Calls Advisor decided to eliminate the risk associated with the earnings report and closed out the short puts position in CAT today at a very nice profit. The transactions history is:

07/18/2011 Sold 2 Caterpillar Inc. (CAT) Aug2011 $110.00 Puts @ $4.30
Note: the price of CAT stock was $106.86 today when these puts were sold.
07/21/2011 Bought-to-Close 2 CAT Aug2011 $110.00 Puts @ $1.10
Note: The price of CAT was $111.90 when this transaction was executed.

The overall performance result(including commissions) for the Caterpillar Inc. (CAT) transaction was as follows:
100% Cash-Secured Cost Basis: $22,000.00
= $110.00*200

Net Profit:
(a) Options Income: +$619.10
= ($4.30-$1.10)*200 shares - 2*$10.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation: +$0.00
= ($110.00-$110.00)*200

Total Net Profit: +$619.10
= (+$619.10 +$0.00 +$0.00)

Absolute Return: +2.8%
= +$619.10/$22,000.00

The $619.10 profit on this trade captured 74% of the maximum potential profit of $840.60 that would have been achieved if the position would have been held until expiration tomorrow (Friday) afternoon's closing and if the stock had remained about $110.00. With the uncertainty surrounding the potential stock price movement after earnings are released tomorrow morning, it was determined that the most prudent decision was to capture the $619.10 profit now and to thereby abandon the potential for an additional $221.50 =($840.60-$619.10) profit. The Covered Calls Advisor decided to show only the Absolute Return for this transaction and to forego the normal practice of converting the absolute return to its associated annualized return on investment percent. This +2.7% absolute return in only 3 days is an outstanding result, but extrapolating to a very, very large annualized return would not provide a meaningful comparison considering the very short duration of this trade.

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