Picking a Strike Price

One of the final steps in analyzing a potential covered calls position prior to its purchase is deciding which expiration month and at which strike price to sell the options. For this advisor, the near-month expiration is almost always the preferred choice, and the reasons for this preference were explained in a prior post (Link) on this blog site. So for the Covered Calls Advisor, picking the expiration month is a very straightforward process -- simply pick the nearest-month option. But which strike price should be selected? Should an out-of-the-money(OTM), at-the-money(ATM), or in-the-money(ITM) strike price be chosen? This topic is the focus of the remainder of this article.

The Covered Calls Advisor's current overall stock market outlook is always shown at the top of the right-side column of this blog. As you might recall, two prior articles (Developing an Overall Stock Market Outlook and Changes to the Overall Market Outlook) described the seven measures now used by the Covered Calls Advisor to determine the current Overall U.S. Market Meter indicator. These seven factors are:
1. U.S. Earnings and Bond Yield Spread
2. Rest-of-World Earnings and Bond Yield Spread
3. Inflation
4. Real Earnings Growth
5. Current Versus Expected P/E Ratios
6. Investor Sentiment (also known as Price Momentum)
7. Gut Feeling

At the present time, the U.S. Market Meter shows that the Covered Calls Advisor's current outlook is "SLIGHTLY BULLISH; and the corresponding investing strategy is: SELL SLIGHTLY OUT-OF-THE-MONEY COVERED CALLS." This doesn't mean that every covered calls position established in our portfolio should be 'slightly out-of-the-money'-- that is neither practical nor desirable. But, a covered calls portfolio should nevertheless, on average, provide a good reflection of our current 'slightly OTM' preference. The average preference for the various possible Overall Stock Market Investing Outlook categories is:
Very Bullish -- Sell Deep OTM Covered Calls
Bullish -- Sell Moderately OTM Covered Calls
Slightly Bullish -- Sell Slightly OTM Covered Calls
Neutral -- Sell ATM Covered Calls
Slightly Bearish -- Sell Slightly ITM Covered Calls
Bearish -- Sell Moderately ITM Covered Calls
Very Bearish -- Sell Deep ITM Covered Calls

For a practical example, let's consider how these guidelines apply to the current Covered Calls Advisor Portfolio (CCAP). CCAP now contains 13 covered calls positions (Note: the current CCAP positions can be found in the right-side column of this blog) that were distributed as follows when the positions were first established:
Deep OTM (more than 6.0% below the strike price) -- 2 positions
Moderately OTM (from 3.1% to 6.0% below the strike) -- 1 position
Slightly OTM (from 1.1% to 3.0% below the strike) -- 4 positions
At-the-Money (from 1.0% below to 1.0% above the strike) -- 3 positions
Slightly ITM (from 1.1% to 3.0% above the strike) -- 2 positions
Moderately ITM (from 3.1% to 6.0% above the strike) -- 1 position
Deep ITM (more than 6.0% above the strike price) -- no positions

Based on the current 'slightly bullish' market outlook, it is observed that only 4 of the 13 positions corresponded to the most preferred 'slightly out-of-the-money' category. Nevertheless, the overall portfolio does, on average, most closely reflect the 'slightly bullish' current overall market sentiment of the Covered Calls Advisor. In addition, it is noted that the OTM positions were established in those companies where this advisor feels most bullish about the stock's appreciation prospects and also where there is a greater likelihood that the CCAP would likely want to retain that particular stock for writing additional covered calls in future months. Conversely, the ITM positions were established where our bullish conviction in a particular company is not as strong and where our primary objective is to make the maximum possible profit from the position by having the stock called away (the option exercised) on the expiration date.

Picking the strike price is more of an art than a science; but hopefully this article has stimulated your thinking about this topic and will be helpful to you in formulating your own stike price selection process.
As always, I welcome your thoughts, comments, or questions -- which you can share by clicking on the 'comments' link below.

Regards and Godspeed,

When "No News Is Good News"

Today I'm reminded of the importance of having a well-defined investment decision-making process. Equally important is to be disciplined by abiding with the investing rules that we have established for ourselves. That's not to say that we should be rigid in our investing approach and never modify our process. To the contrary, we are constantly testing and analyzing our approach and seeking modifications (tweaks if you will) that will further improve our processes. But at any given moment in time, we should follow the rules we have established for ourselves in making our covered calls investing decisions.

One of the tenets of the Covered Calls Advisor is to try to avoid investing in any company whose earnings will be announced prior to the options expiration date. Since this advisor sells near-month covered calls, it is not difficult to find numerous good companies to purchase that meet this criteria. Often, a quarterly earnings announcement will surprise investors and cause a quick and large price movement in the stock. Any surprises (especially negative news) that trigger dramatic stock price moves are anathema to the covered calls investor. So, to avoid the potential substantial declines that sometimes result from negative earnings surprises, why not negate this possibility by simply not buying any company with an earnings release prior to the options expiration date?

As covered call investors, the majority of our return-on-investment comes from the decline in time value of the options sold. A company with less stock price volatility is much preferred to one with a highly erratic (especially a declining) stock price. In this regard, earnings news often increases a stock's volatility -- so since we have the opportunity to invest in companies for time periods during which they will not make an earnings announcement, then we should consider doing just that. Earnings news provides both positive and negative surprises, neither of which is desirable for the covered calls investor. By avoiding earnings releases, we give some credence to the adage -- "No News is Good News".

This month for example, one company that met all my criteria (except one) as a good covered calls investment candidate was Autodesk (ADSK). Most importantly, ADSK had a 'Buy' rating from both of my preferred stock selection advisors (Schwab Equity Ratings and MarketGrader.com). By the way, Goldman Sachs, Argus, Standard & Poor's, and Reuters all also had 'Buy' ratings on ADSK. It also earned a very high overall rating on my 'Analysis Sheet' when all the additional factors were entered there. However, I decided against taking a March '08 covered calls position in ADSK for the one and only reason that their quarterly earnings release would be on Feb.27th (i.e. prior to the Mar08 options expiration date).

Today, because of Autodesk's earnings announcement, I'm very pleased that I have the no-earnings-release criterion and that I maintained sufficient discipline and abided by that rule. Investors were disappointed today when ADSK announced earnings that were below analysts' expectations. The stock was pummeled (down 15.6% from yesterday's $39.10 closing price to $32.99 at today's close). This example today has confirmed two important investing principles for this advisor, namely:
1. Have a well-defined investment decision-making process; and
2. Stay disciplined by following that decision-making process.

Regards and Godspeed,

Buy Celanese Corp

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

Established Celanese Corp. Covered Calls for Mar08

02/22/08 Bought 300 CE @ $40.62
02/22/08 Sold 3 CE Mar08 40 Calls @ $1.95

Annualized Return If Exercised: +41.2%
Downside Breakeven Protection: 4.8%

This is the final investment in CCAP for now -- the portfolio is now fully invested at 99% invested and 1% cash.

Buy Charles Schwab Corp.

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

Established Charles Schwab Corp. Covered Calls for Mar08

02/21/08 Bought 1000 SCHW @ $20.10
02/21/08 Sold 10 SCHW Mar08 20 Calls @ $1.05

Annualized Return If Exercised: +57.4%
Downside Breakeven Protection: 5.2%

I expect that SCHW will be the only financial sector position in the CCAP for March08 expiration. Although committed to sector diversification in my investments, I continue to be underweighted in financials at the present time. I am very pleased to be able to add this in-the-money covered calls position because of its high potential annualized return (+57.4%). Schwab continues to experience good growth in client assets, having achieved a 10% increase over the past year. Moreover, client transactions grew by 33% in January08 compared with the previous year (Jan'07). They have no exposure to sub-prime credit risk and the 2007 establishment of the Schwab Bank provides a new and significant catalyst for further client asset growth in 2008.

In the interest of full disclosure, I am a Schwab customer.

Rating a Company's Management

Good stock selection, defined as finding and investing in currently underpriced companies, is Job #1 for the covered calls investor. A previous post described this advisor's top-down approach to stock selection -- Link. The basic process is to identify those companies rated as 'Buy' by both stock selection advisory services used -- this will provide a list of about 300 companies. The list is trimmed further by eliminating those companies with low options liquidity, high historic volatility, or imminent earnings releases. This process will result in about 125 investment candidates. Then some additional fundamental screening criteria are applied to reduce the list of potential investment candidates to about 60 companies, at which point each company is analyzed in detail. This advisor uses an Analysis Sheet for each company to present critical metrics in ten primary categories for each company analyzed. These categories are: ROI, Downside Protection, Safety, Profitability, Stock Ratings, Value, Growth, Momentum, Options Liquidity, and Management. This article presents an overview of the method used by this advisor to rate one of these ten analysis categories, namely a company's Management.

Of these ten categories, evaluating a company's management effectiveness is definitely the single most difficult one to assess. Most of the other categories have highly quantifiable metrics that can be obtained from a company's historical financial statements. But evaluating a company's current management is a daunting task in that it requires us to make subjective judgments about the individuals leading the company, primarily the CEO and CFO. Despite this difficulty, it is an important exercise to undertake because of the critical influence of top management to the future success of the company. The difference between excellent, mediocre, and weak management teams on overall company performance is normally substantial, so doing our homework in this area is not easy, but it is essential.

The Management Grade sheet for Disney shows the specific evaluation factors and the grades given by this advisor. The CEO/CFO information at the top of the form is normally available from the company's own website. The Corporate Governance Quotient(CGQ) is the best available independent measure of a corporation's overall management stewardship and is available via Yahoo Finance. The remaining evaluations are conducted by listening to the company's latest quarterly conference call -- this is normally available on the company's own website for several days (or even weeks) after the earnings release date.

A detailed explanation of why each of the attributes included on the Management Grade form were chosen is not provided at this time. For now, it is sufficient to say that grades are assigned on the A,B,C,D,F grading system. Any company not receiving an Overall Grade of A or B is eliminated from further consideration as a potential investment.

Again, this homework is not easy. It is definitely time consuming. But because of the critical importance of senior management to the future success of any company, taking the time to conduct a management evaluation is an essential part of our overall stock selection process.

Regards and Godspeed,

Buy Boeing, Disney, Frontier Oil, Humana, Microsoft, Mylan, SPDR S&P 500 Index Trust, and Verizon

Eight new covered call positions were established today in the Covered Calls Advisor Portfolio(CCAP) as follows:

1. Boeing Covered Calls Established for Mar08

02/20/08 Bought 200 BA @ $84.35
02/20/08 Sold 2 BA Mar08 85 Calls @ $2.40

Annualized Return If Unchanged: +33.5%
Annualized Return If Exercised: +42.6%
Downside Breakeven Protection: 2.8%


2. Disney Covered Calls Established for Mar08

02/20/08 Bought 600 DIS @ $32.09
02/20/08 Sold 6 DIS Mar08 32.5 Calls @ $.80

Annualized Return If Unchanged: +29.3%
Annualized Return If Exercised: +44.4%
Downside Breakeven Protection: 2.5%


3. Frontier Oil Covered Calls Established for Mar08

02/20/08 Bought 500 FTO @ $37.60
02/20/08 Sold 5 FTO Mar08 40 Calls @ $1.35

Annualized Return If Unchanged: +42.2%
Annualized Return If Exercised: +117.4%
Downside Breakeven Protection: 3.6%


4. Humana Covered Calls Established for Mar08

02/20/08 Bought 200 HUM @ $68.65
02/20/08 Sold 2 HUM Mar08 70 Calls @ $2.20

Annualized Return If Unchanged: +37.7%
Annualized Return If Exercised: +60.9%
Downside Breakeven Protection: 3.2%


5. Microsoft Covered Calls Established for Mar08

02/20/08 Bought 800 MSFT @ $28.15
02/20/08 Sold 8 MSFT Mar08 29 Calls @ $.67

Annualized Return If Unchanged: +17.4%
Annualized Return If Exercised: +39.4%
Downside Breakeven Protection: 2.4%


6. Mylan Covered Calls Established for Mar08

02/20/08 Bought 800 MYL @ $12.85
02/20/08 Sold 8 MYL Mar08 12.5 Calls @ $.75

Annualized Return If Unchanged: +36.6%
Annualized Return If Exercised: +36.6%
Downside Breakeven Protection: 5.8%


7. SPDR S&P500 Index Trust Covered Calls Established for Mar08

02/20/08 Bought 200 SPY @ $133.89
02/20/08 Sold 2 SPY Mar08 135 Calls @ $3.55

Annualized Return If Unchanged: +36.1%
Annualized Return If Exercised: +45.8%
Downside Breakeven Protection: 2.7%

Although the first quarter dividend has yet to be declared, the annualized returns for SPY above includes an estimated quarterly dividend of $.551 to go ex-div in mid March.

8. Verizon Covered Calls Established for Apr08

02/20/08 Bought 300 VZ @ $33.94
02/20/08 Sold 3 VZ Apr08 35 Calls @ $1.30

Annualized Return If Unchanged: +31.5%
Annualized Return If Exercised: +50.9%
Downside Breakeven Protection: 3.8%

The annualized returns for VZ above includes the $.43 quarterly dividend which will go ex-div in early April.

iShares MSCI South Korea Index ETF -- Continuation Transaction

The following transaction was made yesterday to establish a covered calls position against the 800 shares of EWY:
02/19/08 Covered Calls Continuation Transaction -- STO 8 Mar08 63 Calls @ $.80

The Transactions History to date is as follows:
11/28/07 Bought 800 EWY @ $65.22
11/28/07 Sold 8 EWY Dec07 68 Calls @ $1.75
12/15/07 Dec07 Options Expiration Date – EWY closed below the strike price
12/24/07 Ex-Dividend Date $.369 * 800 shares
01/25/08 Covered Calls Continuation Transaction -- STO 8 Feb08 62 Calls @ $1.00
02/16/08 Feb08 Expiration Date -- EWY closed below the strike price
02/19/08 Covered Calls Continuation Transaction -- STO 8 Mar08 63 Calls @ $.80

The overall performance results(including commissions)for the EWY transactions through the Mar08 expiration would be as follows:
Stock Purchase Cost: $52,185.95
($65.22*800+$9.95 commission)

Net Profit:
(a) Options Income: +$2,792.15 [800*($1.75+$1.00+$.80) - 3*$15.95 commissions]
(b) Dividend Income: +$295.20 (800*$.369)
(c) Capital Appreciation (If stock price unchanged from $58.54): -$5,363.90
= ($58.54-$65.22)*800 - 2*$9.95 commissions
(c) Capital Appreciation (If exercised): -$1,795.90
= ($63.00-$65.22)*800 - 2*$9.95 commissions

Total Net Profit(If stock price unchanged at $58.54): -$2,276.55
= (+$2,792.15 +$295.20 -$5,363.90)
Total Net Profit(If stock price exercised at $63.00): +1,291.45
= (+$2,792.15 +$295.20 -$1,795.90)


Annualized Return If Unchanged (ARIU) -13.8%
(-$2,276.55/$52,185.95)*(365/115)
Annualized Return If Exercised (ARIE) +7.9%
(+$1,291.45/$52,185.95)*(365/115)

Herbalife -- Continuation Transaction

The following transaction was made today to continue the covered calls written against the 500 shares of HLF:
02/19/08 Covered Calls Continuation Transaction -- STO 5 Mar08 40 Calls @ $3.20

The Transactions History to date is as follows:
12/26/07 Bought 500 HLF @ 39.32
12/26/07 Sold 5 HLF Jan08 40 Calls @ $1.40
01/19/08 Jan08 Options Expiration Date -- HLF closed below the strike price at $39.81
01/29/08 Covered Calls Continuation Transaction -- STO 5 Feb08 40 Calls @ $1.60
02/16/08 Feb08 Options Expiration Date -- KCI closed below the strike price at $39.46
02/19/08 Covered Calls Continuation Transaction -- STO 5 Mar08 40 Calls @ $3.20


The overall performance results(including commissions)for the HLF transactions through Mar08 expiration would be as follows:
Stock Purchase Cost: $19,669.95
($39.32*500+$9.95 commission)

Net Profit:
(a) Options Income: +$3,058.90 (500*$1.40 + 500*$1.60 + 500*$3.20 -3*$13.70)
(b) Dividend Income: $0
(c) Capital Appreciation (If exercised): +$320.10
= ($40.00-$39.32)*500 - 2*$9.95 commissions
Note that the stock price was slightly in-the-money today when the transaction was made.

Total Net Profit(If stock price exercised at $40): +$3,379.00
= ($3,058.90 + $0 + $320.10)


Annualized Return If Exercised (ARIE)= +114.0%
(+$3,379.00/$19,669.95)*(365/55)

Hewlett Packard -- Closed

The position in Hewlett Packard (HPQ) was closed today by selling the 500 shares. This decision was made to avoid holding the stock through an earnings release -- which is scheduled for today after the market closes.

Transactions History:
11/28/07 Initial Stock Position -- Bought 500 HPQ @ 49.96
11/28/07 Initial Call Options -- Sold 5 HPQ Dec07 52.5 Calls @ $.55
12/10/07 Ex-Dividend Date -- $.08*500 shares
12/22/07 Dec07 Option Expiration Date – HPQ closed below the strike price at $52.03
12/26/07 Covered Calls Continuation Transaction -- STO 5 Jan08 52.5 Calls @ $1.20
01/19/08 Jan08 Option Expiration Date – HPQ closed below the strike price at $43.75
02/19/08 500 HPQ sold at $44.74

The overall performance results (including commissions) for the HPQ transactions through Feb08 expiration was as follows:
Stock Purchase Cost: $24,989.95
($49.96*500+$9.95 commission)

Net Profit:
(a) Options Income: $847.60 (500*$.55 + 500*$1.20 - 2*$13.70 commissions)
(b) Dividend Income: $40.00 ($.08*500)
(c) Capital Appreciation: -$2,629.90
= ($44.74-$49.96)*500 - 2*$9.95 commissions

Total Net Profit: -$1,742.30
= ($847.60+$40.00-$2,629.90)

HPQ ANNUALIZED ROI: -30.7%
(-$1,742.30/$24,989.95)*(365/83)

February 2008 Expiration Transactions

The Covered Calls Advisor Portfolio (CCAP) contained a total of 7 positions with February 2008 expirations, with the following results:

- 5 positions closed in-the-money and the calls were exercised and the stock was called away. The annualized percent return-on-investment(ROI) results for these positions were:

Endo Pharmaceuticals +18.1%
Halliburton -5.8%
Kinetic Concepts -25.6%
Lockheed Martin -8.0%
RenaissanceRe Holdings -4.5%

The net losses in HAL, KCI, LMT, and RNR are each examples of managing covered call positions in a declining stock. In each instance, covered call positions were rolled down-and-out in order to obtain sufficient options income to lessen the extent of the overall loss caused by the recent decline in the stock market in general and in these four stocks in particular.

- 2 positions (HLF and EWY) ended out-of-the-money. Decisions will be made to either sell the stock, or to keep the stock and sell calls to establish Mar08 covered call positions. The related transactions will be made during the upcoming week and the actual transactions will be posted on this blog site on the same day they occur.

Details for each of the five exercised positions were as follows:

1. Endo Pharmaceuticals -- Closed
A covered calls position in ENDP was established in the CCAP on 01/08/08 and the stock closed in-the-money yesterday (expiration Friday):

Transactions History:
01/08/08 Initial Stock Position -- Bought 500 ENDP @ $27.01
01/08/08 Initial Call Options -- Sold 5 ENDP Feb08 25 Calls @ $2.60
02/16/08 Options Exercised -- STC 500 ENDP @ $25.00
[Note: ENDP stock closed on expiration Friday (2/15/08) at $25.16]

Performance Results(including commissions):
Stock Purchase Cost: $13,514.95
($27.01*500+$9.95 commission)

Net Profit:
(a) Options Income: +$1,286.30 ($2.60*500-$13.70 commission)
(b) Dividend Income: $0
(c) Capital Appreciation: -$1,024.90 [($25.00*500-$9.95)-$13,514.95]
Total Net Profit: +261.40 ($1,286.30-$1,024.90)

ENDP ANNUALIZED RETURN ON INVESTMENT: +18.1%
(+$261.40/$13,514.95)*(365/39)


2. Halliburton -- Closed
A covered calls position in HAL was first established in the CCAP on 10/24/07. The stock was retained for writing November, December, January, and February covered calls. The stock closed in-the-money yesterday (expiration Friday) and the position was closed. The transactions for HAL covered calls were as follows:

The Transactions History to date is as follows:
10/24/07 Initial Stock Position -- Bought 700 HAL @ $40.01
10/24/07 Initial Call Options -- Sold 7 HAL Nov07 40 Calls @ $1.25
11/17/07 Nov07 Option Expiration Date – HAL closed below the strike price at $37.02
11/19/07 Covered Calls Continuation Transaction -- STO 5 Dec07 37.5 Calls @ $.85
11/29/07 Ex-Dividend Date -- $.09*700 shares
12/22/07 Dec07 Option Expiration Date – HAL closed below the strike price at $37.29
12/26/07 Covered Calls Continuation Transaction -- STO 7 Jan08 37.5 Calls @ $1.05
01/19/08 Jan08 Options Expiration Date – HAL closed below the strike price at $32.40
01/25/08 Covered Calls Continuation Transaction -- STO 7 Feb08 35 Calls @ $1.15
02/16/08 Options Exercised -- STC 700 HAL @ $35.00
[Note: HAL stock closed on expiration Friday (2/15/08) at $35.84]

Performance Results(including commissions):
Stock Purchase Cost: $28,016.95
($40.01*700+$9.95 commission)

Net Profit:
(a) Options Income: $2,949.20 (700*$1.25 + 700*.85 + 700*1.05 + 700*1.15 - 4*15.20 commissions)
(b) Dividend Income: $63.00 ($.09*700 shares)
(c) Capital Appreciation): -$3,526.90
= ($35.00-$40.01)*700 - 2*9.95 commissions

Total Net Profit: -$514.70
= ($2,949.20+$63.00-$3,526.90)

HAL ANNUALIZED RETURN ON INVESTMENT: -5.8%
(-$514.70/$28,016.95)*(365/115)


3. Kinetic Concepts Inc. -- Closed
A covered calls position in KCI was established in the CCAP on 11/20/07. The stock was retained for writing December, January, and February covered calls. The stock closed in-the-money yesterday (expiration Friday):

The Transactions History to date is as follows:

11/20/07 Initial Stock Position -- Bought 400 KCI @ 59.53
11/20/07 Initial Call Options -- Sold 4 KCI Dec07 60 Calls @ $2.35
12/22/07 Dec07 Option Expiration Date – KCI closed below the strike price at $54.25
12/26/07 Covered Calls Continuation Transaction -- STO 4 Jan08 55 Calls @ $1.95
01/19/08 Jan08 Options Expiration Date -- KCI closed below the strike price at $50.02
01/28/08 Covered Calls Continuation Transaction -- STO 4 Feb08 50 Calls @ $1.70
02/16/08 Options Exercised -- STC 400 KCI @ $50.00
[Note: KCI stock closed on expiration Friday (2/15/08) at $51.38]

Performance Results(including commissions):
Stock Purchase Cost: $23,821.95
($59.53*400+$9.95 commission)

Net Profit:
(a) Options Income: $2,361.15 (400*$2.35 + 400*$1.95 + 400*$1.70 - 3*$12.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$3,831.90
= ($50.00-$59.53)*400 - 2*$9.95 commissions

Total Net Profit: -$1,470.75
= ($2,361.15 + $0 - $3,831.90)

KCI ANNUALIZED RETURN ON INVESTMENT: -25.6%
(-$1,470.75/$23,821.95)*(365/88)


4. Lockheed Martin -- Closed
A covered calls position in LMT was established in the CCAP on 01/08/08. The stock was retained for writing both January and February covered calls. The stock closed in-the-money yesterday (expiration Friday):

A summary of the LMT transactions to date, including today's roll up is as follows:
1/10/08 Initial Stock Position -- BTO 200 LMT @ $109.62
1/10/08 Initial Call Options -- STO 2 LMT Jan08 110 Calls @ $1.70
01/19/08 Jan08 Options Expiration Date – LMT closed below the strike price at $101.88
01/22/08 Covered Calls Continuation Transaction -- STO 2 Feb08 105 Calls @$2.20
02/16/08 Options Exercised -- STC 200 LMT @ $105.00
[Note: LMT stock closed on expiration Friday (2/15/08) at $105.76]

Performance Results(including commissions):
Stock Purchase Cost: $21,933.95
($109.62*200+$9.95 commission)

Net Profit:
(a) Options Income: $757.10 (200*$1.70 + 200*$2.20 - 2*$11.45 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$933.95 ($105.00-$109.62)*200 - $9.95

Total Net Profit: -$176.85
=(-$933.95+$757.10)

LMT ANNUALIZED RETURN ON INVESTMENT: -8.0%
=(-$176.85/$21,933.95)*(365/37)


5. RenaissanceRe Holdings -- Closed
A covered calls position in RNR was established in the CCAP on 12/27/08. The stock was retained for writing both January and February covered calls. The stock closed in-the-money yesterday (expiration Friday).

The Transactions History to date is as follows:
12/27/07 Initial Stock Position -- Bought 400 RNR @ 60.64
12/27/07 Initial Call Options -- Sold 4 RNR Jan08 60 Calls @ $2.60
01/19/08 Jan08 Options Expiration Date – RNR closed below the strike price at $54.01
01/22/08 Covered Calls Continuation Transaction -- STO 4 Feb08 55 Calls @ $2.75
02/16/08 Options Exercised -- STC 400 RNR @ $55.00
[Note: RNR stock closed on expiration Friday (2/15/08) at $55.99]

Performance Results(including commissions):
Stock Purchase Cost: $24,265.95
($60.64*400+$9.95 commission)

Net Profit:
(a) Options Income: $2,114.10 (400*$2.60 + 400*$2.75 - 2*$12.95 commissions)
(b) Dividend Income: $0
(c) Capital Appreciation: -$2,265.95 ($55.00-$60.64)*400 - $9.95
Total Net Profit: -$151.85 ($2,114.10-$2,265.95)

RNR ANNUALIZED RETURN ON INVESTMENT: -4.5%
=(-$151.85/$24,265.95)*(365/51)

Seagate Technology -- Continuation Transaction

The following transaction was made today to continue the covered calls written against the 800 shares of STX:
02/13/08 Covered Calls Continuation Transaction -- STO 8 Mar08 25 Calls @ $0.45

The Transactions History to date is as follows:

12/26/07 Bought 800 STX @ 25.84
12/26/07 Initial Call Options -- Sold 8 STX Jan08 27.5 Calls @ $.55
01/19/08 Jan08 Options Expiration Date -- STX closed below the strike price
01/30/08 Ex-Dividend Date $.100 * 800 shares = $80 dividend income
02/13/08 Covered Calls Continuation Transaction -- STO 8 Mar08 25 Calls @ $0.45

The overall performance results (including commissions) for the STX transactions through Mar08 expiration would be as follows:
Stock Purchase Cost: $20,681.95
($25.84*800+$9.95 commission)

Net Profit:
(a) Options Income: $768.10 (800*$.55 + 800*$.45 - 2*$15.95 commissions)
(b) Dividend Income: $80.00 ($.100 dividend * 800 shares)
(c) Capital Appreciation (If stock price unchanged from $23.12): -$2,203.90
= ($23.12 - $25.84)*800 - 2*$9.95 commissions
(c) Capital Appreciation (If exercised): -$691.90
= ($25.00-$25.84)*800 - 2*$9.95 commissions

Total Net Profit(If stock price unchanged at $23.12): -$1,355.80
= ($768.10 + $80.00 - $2,203.90)
Total Net Profit(If stock price exercised at $25): +$156.20
= ($768.10 + $80.00 - $691.90)

Annualized Return If Unchanged (ARIU) -27.5% (-$1,355.80/$20,681.95)*(365/87)
Annualized Return If Exercised (ARIE) + 3.2% (+$156.20/$20,681.95)*(365/87)

Returns -- January 2008

At market close on 01/31/2008, the total Covered Calls Advisor Portfolio (CCAP) value was $243,884.68, a $14,001.83 decline in the overall portfolio value since the closing value of $257,886.51 on 12/31/2007.

CCAP January 2008 Absolute Return = -5.4%
($257,886.51-$243,884.68)/$257,886.51

Jan. 2008 Absolute Return for SWBGX Benchmark = -3.3%
($16.79-$16.23)/$16.79

The underperformance of the CCAP compared with the Schwab MarketTrack Balanced Portfolio (SWBGX) benchmark in January is a result primarily of the overweighting in technology which was a below average performer and the large decline in the value of the South Korea ETF. An overweight position in the technology sector is being maintained in February as is the position in South Korea. In this advisor's opinion, both of these areas now provide exceptionally compelling value opportunities.

Although January's performance was disappointing, the Market Meter is still indicating that a slightly bullish investment position is appropriate at this time. The corresponding covered calls investing approach of writing primarily slightly out-of-the-money covered calls will be continued at this time. For 2007, the +10.7% CCAP annualized return exceeded by a substantial margin the +2.2% annualized return of the SWBGX benchmark. Despite the underperformance in January, the objective for CCAP in 2008 will continue to be to exceed our primary benchmark (SWBGX) as well as all other major stock, bond, and money-market benchmarks.

Regards and Godspeed to All,