Covered Call Expert Report

Income Investing with Covered Calls The Simple Strategy that Can Yield 3% to 5% Monthly in Both Bull and Bear Markets While Limiting and Defining Risk

Free Special Report Courtesy of www.callwriter.com

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 didn’t get all the information that is contained in this report! And it’s 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 rocksolid information to you faster than I could have written myself. John’s 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 John’s 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 at [email protected] Cheers

Tim Leary

Special R eport - I n c o m e I n v e s t i n g w i t h C o v e r e d C a l l s

The Simple Strategy that Can Yield 3% to 5% Monthly in Both Bull and Bear Markets While Limiting and Defining Risk

Here a just a few 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 works even with a dropping stock and even in dropping markets. • Learn techniques to limit trade risk to a few percent of the funds invested. • Read about simple, easy-to-use strategies that generate a consistent income. • See undeniable statistical proof that covered call writing is better than stock investing. • 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 our legendary tools really are. • Read actual stories of ordinary people experiencing extraordinary success. • Learn why CallWriter truly is different from other websites for traders. • Learn why the CallWriter Method is one of the lowest-risk strategies 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.


Trading, Investing and Risk “I don’t go to Wall Street for the deals, because that's not where they are!” – Warren Buffett

T he peril s of buy- and- hol d invest ing. Since I was a boy in the 1950s/60s, even long before, the public has been indoctrinated by Wall Street and the financial press to believe that there is one, and only one, method of investing that works: buy stocks for the long haul and hold on to them no matter what, through thick and thin, in the expectation that the stocks will appreciate in value - that is, price. If they are right, and sometimes they are, investors reap the benefits and create wealth. So at least goes the theory. This is the buy-and-hold school of investing. While it has worked for some investors over the decades, it has failed many others. You've probably heard the old saying that the way to make a small fortune in the stock market is to invest a large fortune. Mark Twain famously considered every month of the year "peculiarly dangerous" for investing in stocks. And there's my favorite… Wall Street: a thoroughfare that begins in a graveyard and ends in a river. There's a reason we have no many negative sayings about Wall Street. I have some fundamental problems with the buy-and-hold strategy. First, stocks don't always go up. Most stocks only go up in bull markets, and bear markets can last for years. Some stocks never go up, no matter how canny the investor's evaluation process. Second, while buy-and-hold proponents will tell you not to try and time stocks or the market, timing is everything in long-term investing - that is, you want to catch a rising star instead of a falling knife. Third, it's not just the fundamentals. There is a lot of faddism baked into stock prices, and many times, the stocks that pundits recommend are quite overvalued. Fourth, buy-and-hold does not produce income. Since you could be earning about 4% a year with riskfree US Treasuries, an unproductive asset actually costs you money. You'd better be right about the stock gaining in value over the long term. Fifth, buy-and-hold ties up capital. If you need money for college tuition, for example, you will have to sell those stocks for cash. And trust me, that is precisely when their prices will be down. Sixth, buyand-hold is supposed to represent value investing, but whose value? The Wall Street analysts who privately sneer at the stocks they glibly tell you to buy? Seventh, Wall Street doesn't buy and hold stocks for the long term, even though it urges you to do so (and to buy the products they are peddling at the moment). Wall Street trades, and makes obscene amounts of money doing it. Why do they tell you and me to do something so at odds with what they do so profitably? Eighth, here is the big one: how much time do you have left to invest? Sure, none of us knows the answer, but look at the actuarial tables. If you're in your 30s, you reasonably can suppose you have time for investing to work, assuming you have any money at that age. If in your 40s, not so much time. In your 50s, even less. In your 60s - do the math.Young people tend to have more time, less money; those of us a tad older have money, but maybe not so much time. Wouldn't an income investing strategy that beats the market's average returns to pieces make more sense? Especially if you were in control from start to finish and had the right tools and the requisite knowledge? Well, read on...

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Say, t here are al ways financ ial advisers... and of c ourse, t hose great broker's t ips. Just kidding - broker tips don't work, since brokers are not trained stock analysts, and a surprising number 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 many aren't. Probably most 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 funds and other products they recommend. They make money when you do, and they make money when you don'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-producing investments for yourself, manage them properly and limit your risk, if you choose.

T he t ex t book "safe invest ment s" just pic k your poc ket s. 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 bonds pay a higher return, but offer a much lower degree of safety. What a Hobbesian choice - a safe, horrible return, or a slightly better but riskier return. The dollar (falling and at a 15-year low as I write) and inflation are wiping out those miniscule returns, anyway. The government's core inflation measurement does 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 no more than protect your nest egg, and that's IF the nest egg outruns inflation and the dollar fall. They will not build wealth.

I f you have not had c onsist ent suc c ess: why not? Here's an answer that makes a lot of sense: the deck is stacked against the retail investor and trader. Do you have the skill to pick the stocks that will gain in value in a few years, a few months, a few days? 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 day traders and swing traders, and can you sit in front of a computer monitor all day waiting to catch the moves? 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. You've tried a strategy that worked sometimes, but sometimes not, and losses

2. overwhelmed the good trades.

You subscribed to a picks service, and the picks were bad, uneven or only

3. worked in certain market environments.

2


You keep flitting from one strategy to another, but they all produce uneven

4. results - or losses.

You've tried buy-and-hold investing and your account just doesn't grow because

5. the stocks didn't grow - and of course didn't produce income. 6.

You've been to seminars that didn't help (mine do, by the way), because they didn't show you how to make money, and mostly wanted to upsell you to other products. Or maybe, just maybe, you've never deployed a strategy that can work

7. consistently in different markets, because you just didn't know there was 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.

I t 's al l about c ash fl ow, not invest ment savvy or st oc k- pic king. 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 the earnings report, not the asset report or book value report. Cash flow: business lives 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 or ever will do? It really is simple. Your money should be working for you - conservatively, regularly generating income.

T he al t ernat ive: inc ome invest ing using t he Covered Cal l st rat egy. Does the idea of using an income investing strategy to generate 3% to 5% a month on your funds appeal to you? That's 36% to 60% annually, without any compounding of returns. Do you like the idea of confining your investing to only high-quality, conservative stocks, the kind that competent financial advisers would recommend if they didn't live primarily on commissions on the products they actually recommend? How about using a simple strategy to limit your risk in each trade to only a few percent of the amount invested? Note: According to the Chicago Board Options Exchange (CBOE), the world's largest, writing covered calls is more 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 whose popularity is growing in leaps and bounds...

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What is a Covered Call? T he c overed c al l is simpl ic it y it sel f. You buy shares of stock and write (sell) call options (calls) against them. Or if you already own the shares, 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 option premium. Here's how it works:

1. You buy the stock, or already own it; 2. You sell call options against the stock; 3. You pocket the call premium; 4. You sell the shares, locking in your profit; then do it again! 5. If you want, you can limit risk to a few percent of the funds employed. Now, how difficult does that sound? It isn't difficult, and it is very easy to learn. The hard part, as in all investing, is to exercise patience and discipline. But first we must be clear what call options are...

Cal l Opti ons and W hy W e Love Them “An investment in knowledge always pays the best interest.” – Benjamin Franklin

What is a c al l opt ion? A call option (or just "call") is a standardized contract that gives the holder the right, but not the obligation, to buy 100 shares of stock that are subject to the option (the "underlying stock") at a predetermined price (the "exercise" or "strike" price) for a set period of time. In other words, you are selling someone 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, you pocket the premium from selling the calls. You also are giving the holder of those calls the right to buy your shares 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.

Some import ant c al l opt ion t erms: Every stock option has a fixed life span. If an option is not exercised before it expires, it is said to expire worthless. 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 away by the purchaser.

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A standard option contract covers 100 shares of stock, so for example to write calls on 500 shares, you would have to write 5 contracts (5 x 100). Even though options are contracts, they are not like a loan or purchase agreement - there is no physical contract. The Options Clearing Corporation (OCC) sets the terms of all equity (stock) options. In fact, all equity call options are identical except for: 1) the st ri k e p ri c e (ex: $35); 2) the e x p i rat i o n m o n t h (January, February, etc.) 3) the u n de rl y i n g st o c k subject to the option (ex: General Motors) This is why selling an option is referred to as writing a contract. But you don't literally "write" anything, nor is there any paper contract to negotiate or prepare. You just buy or sell options, pretty much like stock, by entering an order with your broker (very simple, and I'll show you how). Stocks are simply bought or sold (or can be sold short). But you initiate a purchase or sale of options by buying or selling to open. You close the position by then selling or buying to close - that is, the opposite order.

So, what is "c overed" about c overed c al l s? When you sell calls, you essentially are committing to sell the stock at the call's exercise price. By already owning the underlying stock, your obligation to deliver the shares if called out is covered. If you did not own the shares, the calls would be uncovered - or naked. And naked calls are very risky. Suppose you sold the $35 call on a stock you did not own and the stock gapped up overnight to $80? There actually are stocks that do this. You might have to go into the market and buy the stock at $80 only so you could sell it at $35 under the call option. This is why we only write covered calls.

Why do peopl e buy c al l s? Call options provide great leverage. Call options generally are very cheap compared to buying the stock itself, so buying a call option gives you the right to control shares of the underlying stock - - you control them because you can buy the stock at the exercise price during the option’s life - at your sole choice. People buy call options in the expectation that the stock price will rise before the calls' expiration date, in which event the call holder can realize a very nice profit. Example: Suppose that in mid-November you could buy the Apple (AAPL) December $60 call for $2.25. This would give you the right for roughly a month to buy AAPL shares at a price of $60 - you would control those shares. If AAPL went over $60 (it did), you could sell the DEC 60 Calls for a big profit. You could have bought 100 shares of AAPL for $56 a share, or $5,600; but you could have bought one $60 call option contract giving you the right to buy 100 AAPL shares at a price of $60 per share, and the call option would cost you $2.25 a share, or $225. That's leverage. Example #2: Suppose now that AAPL in fact goes to $65. The stock buyer who paid $56 would have a gain of $9.00, or 16%. However, the value of the calls would appreciate approximately $9.00 in value also, but since the calls only cost $2.25, the $9 increase is a 400% return. This is why people buy calls – the chance at hitting a home run. Remember, though, the call buyer must be right on the stock direction and right on the timing.

What is t he downside t o buying c al l s? There is a big downside. The stock must move enough to produce a profit, and must make the move before the option expires. So you have to get both the timing and direction right. If the stock does not move by expiration, the option will expire worthless, or the holder will be forced to sell it before expiration, taking either a small or large percentage loss on the trade. The risk is exacerbated by the fact that options lose a little value every day (known as "time decay") and lose the greatest part of their value in the last 30 days before expiration. This time risk for the call holder, however, is a good thing for the call writer. Time is the call holder's enemy, but the call writer's friend.

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What makes writ ing c al l opt ions so great ? Writing (selling) call options produces income, but the story gets even better. According to the OCC, only 10 % of all option contracts are exercised. Just 10%. This means that the other 90% are never exercised. About half or bought or sold to close by hedgers, and about half expire worthless. So nearly half of 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 speculators are buying calls in hopes of price movement; we are simply selling them all the calls their little hearts desire.

Call Buying (Speculation) Risk Percentage 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 very high-quality stocks. This generates huge returns. I talk further on about what a "high-quality" stock is, and isn't.

I f you c oul d l ose t he st oc k, why sel l c al l s? Since the call gives the holder the right to buy the stock, you could lose the stock when it is called away. This only happens, of course, if the call is "in the money," meaning that the stock price is higher than the calls' strike price. Why would the owner of stock want to lose the stock? The answer is that selling calls on the shares generates premium income. Besides, covered call writers mostly buy stocks and 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 same stock). 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.

Guess who writ es t he most c overed c al l s of al l ? The answer: the large institutional money managers; pensions, mutual funds, hedge funds, and any institution that holds a portfolio of stocks. It only makes sense... why would they just sit there hoping the stocks will go up when they could make the portfolio in effect pay a monthly dividend by selling call options against the shares? The institutions sell more covered calls than anybody. If they're doing it, why aren't you? Think about it: which side should you be on... the speculative side or the income side? The buyand-hold crowd would exhort you to buy stocks and hold them indefinitely and unproductively, but selling covered 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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A Covered Call Example How t he c overed c al l works: 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 $ 1.7 0 premium. This would bring in $ 17 0 of premium ($1.70 x 100 shares). Writing the calls lowered our cost basis in the shares to $33.30 (35.00 - 1.70), slightly reducing our risk from a price drop. If we sell the shares for $35 or more after the calls expire, we keep the entire $1.70 in call premium. In the normal case, we would be in this trade for 30 days or less. This $1.70 premium would represent a 5 .1% return (1.70 ÷ 33.30 cost) for a one-month trade. I'm not exaggerating, a 5.1% return on your money for one month on a very conservative stock. Of course, 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 the calls sold is the same as the stock's price:

General Motors (GM) At-the-Money $35 Calls Written Action

Amount

Cost Basis

Bought GM shares

-$ 35.00

$35.00

Sold GM Dec. 35 Call

+$

1.70

$33.30

+$ 35.00

$0

Sold GM shares

Net Profit ( 5.1 % )

+$ 1 .7 0

That's not bad for a trade of 30 days or less! That's more than your "uncle" in Washington pays in interest on T-Bills for an entire year! A 5.1% return for one month roughly equates to a 6 1.2 % annual return, without even compounding returns (more on that later). Now, that should get your motor running! This is why we write covered calls. If GM's price is above $35 when the option expires (they expire on the Saturday after the 3rd Friday of each month), then the stock will be called away - you will have 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 little further 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-strike out-of-the-money $40 call (instead of the $35 call) for a $ 0 .6 5 premium, or $ 6 5 in total premium. This call write lowers our cost basis to $34.35. If we are called out at the higher $40 strike price, our profit will be $ 5 .6 5 per share ($565) a whopping 16 .4 % for one month, an eye-popping 19 6 .8% annualized!

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General Motors (GM) Out-of-the-Money $40 Calls Written Action Amount Cost Basis Bought GM shares

-$ 35.00

$35.00

Sold GM Dec. 40 Call

+$ 0.65

$34.35

Sold GM shares when called

+$ 40.00

0

Net Profit ( 1 6.4% )

+$ 5.65

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 exercise price. Had the GM shares not made the hoped-for move, we still would have pocketed the $0.65 premium for a return of 1.89 % ; not a great return at all, but it still annualizes to a 2 2 .7 % return. A return of 1.9% a month 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 only rose to $37? The answer is that the stock would not be called away (no one would exercise a call to buy it at $40 when it is trading at $37), and we could sell it at $ 3 7 . This would still bring in an extra $200 per share profit - total return on the trade in that case would be $ 2 .6 5 , or 7 .7 % (2.65 ÷ 34.35 cost), which is only 9 2 .4 % annualized; only!

When A Good Stock Drops: You Can Still Make Money! What happens if t he st oc k's pric e drops? 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 than the amount of premium income it generates. A drop in stock price for a large, established company is immaterial unless it is due to a profound change in the company's prospects. The following General Motors example illustrates this dynamic. The table below shows the variations in stock price of General Motors from February 2004 ($54) through mid-October 2007 ($38):

General Motors Price Analysis Swing Highs

Price

Swing Lows

Price

February 2004

$54 April 2005

$25

July 2005

$38 December 2005

$19

February 2007

$37 March, May 2007

$29

June 2007

$39 October 2007

$29

October 2007

$38

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Note the swings in price over 3.5 years of trading. 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 took almost two years. GM has been somewhat volatile over time (for a blue-chip), but it's still a giant company that – due precisely to that same volatility – has thrown off great premium most of the time. Take a look at the following weekly chart of GM. Ugly, right? Not for a covered call writer:

Assume that the average price of GM during the period of February 2004 through October 2007 (42 months) was only $30. It was actually closer to $35, but let’s use $30 to be conservative. The next table shows 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 Analysis February 2004 - October 2007 Avg. Price

Avg. Mo. Return

Avg. Premium

Premium Stream (x 42 mo.)

1,000 Shares

$30

4%

$1.20

$50. 40

$50, 400. 00

$30

3%

$0.90

$37. 80

$37, 800. 00

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 of 4% per expiration month, we would have netted an average return per month of $ 1.2 0 . That would be a total premium stream for the 42-month period of $ 5 0 .4 0 (30 x 4% x 42). Had we owned and written 1,000 shares, the return before commission costs would have been $ 5 0 ,4 0 0 . 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, nor does it assume buying more shares when GM was cheaper. Even at an average of 3% per month, which is lower than actual historical premium levels, writing GM for this period would have yielded $ 3 7 .80 per share in income, or $ 3 7 ,80 0 on 1,000 shares. Yet actual 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 $ 5 0 of premium income before trade costs, and we would still own a stock worth $38 - that still is throwing off excellent call 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 the shares again and kept writing. Note: This technique of writing a stock that is down for continuing income assumes that you confine call writing to large, established and profitable companies - the best companies. Writing unprofitable companies should be restricted only to giant companies such as General Motors.

I s it nec essary t o hol d ont o a st oc k for years? No, absolutely not. In fact, the classic covered call strategy is to buy stocks of top companies that offer good levels of premium, write calls on them for income and then sell the shares. This is known as the buywrite strategy, for obvious reason. This strategy maximizes income, since its logic is to pick high-quality stocks (those you would be willing to hold for years) that happen to offer good premium. But there is nothing wrong with holding good stocks for years and collecting a "monthly dividend" on them by writing call options each month. That's another great thing about covered call writing - there are many strategies to deploy, from conservative to directional. Like the burger commercial said, you can have it your way.

I 've heard t hat peopl e c an l ose money wit h c overed c al l s. I s t his t rue? Of course it is. Any time there is a chance to make money, there is risk - although my SuperPut covered call strategy comes about as close to riskless as possible. But over a decade of writing covered calls and watching what hundreds of CallWriter members have done, it is quite clear where the losses come from: poor stock selection (writing small, unprofitable or overvalued companies, primarily) and in the case where good stocks were written, from panicking over ordinary price movements - instead of creaming the stock for more premium. In other words, most losses in covered call writing are needless and come from thinking like swing traders instead of income investors. The General Motors example above furnishes a perfect example. Many people would have panicked and 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 the high levels of premium and income stream GM yielded, instead of panicking over the stock price. Keep your trade selection frosty (I teach you how), and use patience and discipline. This will keep your account raking in a fine income stream. We've now looked at what a covered call is and how it works to produce income. Now let's take a look at how covered call writes do depending on how the underlying stock performs.

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Why covered calls are better: (They win in 4 out of 5 possible price movements.) T hink about it - what c an a st oc k do? 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 lot in price.

2.

Go up slightly in price.

3.

Stay about the same price.

4.

Go down slightly in price.

5.

Go down a lot in price.

Most t rading st rat egies require st il l ness or movement . Day trading or active-trading stocks, buying calls or puts, short selling, bullish spreads, creating straddles or strangles... these directional strategies win if the stock either advances or stock declines. The stock has to move in order for the trade to produce a profit. Strategies like credit spreads, on the other hand, win if the stock doesn't move but can lose quickly if it does move. That is, most trades win in only ONE or TWO out of FIVE possible price actions. That's just the way it is.

But Covered Cal l s win in 4 of the 5 possibl e pric e ac t ions! In a properly-executed covered call writing strategy, the trade wins in 4 of the 5 possible price movements, as shown in the table below. Of course, an income investor using the CallWriter Method, who sticks with the best companies, doesn't worry too much about a declining stock and simply keeps raking in the premium every month.

Wins Wins

Stock goes up a lot in price.

Wins Wins

Stock stays about the same price.

Loses*

Stock goes up slightly in price.

Stock goes down slightly in price. Stock goes down a lot in price.

*We might or might not take a loss on a stock that drops a lot. There are techniques to protect against loss on a dropping stock and even profit from it.

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

You make money when t he st oc k goes up. In this case you also make the full 3% to 5% return expected, plus you can make an extra profit on the stock's move up. If you are quite bullish on a rising stock, there are ways to capitalize on the stock's movement.

You c an win on a dropping st oc k. We've had stocks drop while we were in a trade and still made a profit, because we built the trade right and the stock closed above our breakeven point! We didn't make as much as we hoped, but it was still a profit, which is always better than a sharp stick in the eye! And if the stock is high-quality, you can hold 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, with the industry, and on their own. Unless the fundamental quality of the company has changed, why take a loss on great company? Better yet, my SuperPut strategy allows you to protect the trade, limiting risk to only a few percent of the trade funds and to eventually make the trade riskless - this makes the dropping stock someone else's problem.

What ot her st rat egy provides t his fl ex ibil it y and profit abil it y? To be brutally honest, I can't think of a one. Almost all trading strategies either rely on the stock moving, 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; there is 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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Statistical Proof: Cov ered call income inv esting performs better than buy-and-hold stock inv esting “Writing covered calls is more conservative than just owning stock.” – Chicago Board Options Exchange

T he S&P 500 Buy- Writ e I ndex 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. The CBOE S&P 500 BuyWrite Index (BXM) simulates the return that could be expected from writing the nearest-month covered call on all the stocks in the S&P 500 stock index, good and 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-call writing of all S&P 500 stocks compared to simply buying and holding all the S&P 500 stocks during the same period, which is good old buy-and-hold investing. In other words, if one bought and held every S&P 500 stock for years and another bought the same stocks but simultaneously also wrote a covered call on every S&P 500 stock over the same period - how would each strategy do? Answer: over the last 15 years, covered call writing won! And it also provided far less portfolio volatility 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 covered call returns, or to avoid stocks in a downtrend or expecting life-and-death news, nor were any trade management 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 500 Percent returns by Calendar Year, 1989-1995 1989

1990

1991

1992

1993

1994

1995

BXM

25.0

4.0

24.2

11.5

14.1

4.5

21.0

S&P

31.7

3.1

30.5

7.6

10.1

1.3

37.6

Percent returns by Calendar Year, 1996-2003 1996

1997

1998

1999

2000

2001

2002

2003

BXM

15.5

26.6

18.9

21.2

7.4

-10.9

-6.7

19.4

S&P

23.0

33.4

28.6

21.1

-9.1

-11.1

-22.1

28.7

Source:

Chicago Board Options Exchange

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For the total 15-year period examined, the average annualized return from covered call writing was 12.4%, versus 12.2% for buy-and-hold investing. That is, covered call writing beat the buy-and-hold stock investing strategy! The margin of victory was not huge, but remember: the BXM strategy duplicated the results of writing every S&P 500 stock, even the weak, unprofitable ones - which a covered call writer never 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 the right 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 9 .1% , -11.1% and -2 2 .1% . Great Scott! But here's the fun part: since you cannot buy every S&P 100 stock, 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 making 3 0 % + every year, by focusing on the very best stocks with acceptable call-writing returns. And you get to decide what is acceptable. On the other hand, the volatility experienced when writing covered calls is significantly lower than simply buying stocks. The standard deviation (calculated monthly) of covered call writing over the 15 years was 9 .9 % compared to 14 .7 % for buy-and-hold investing, which means that covered call returns showed only two-thirds as much volatility as buying and holding S&P 500 stocks.

Writing Portfolio Stocks Why not make your st oc ks pay a mont hl y dividend? Stocks can laze around your portfolio while you wait for them to catch fire, if they do. Or, you can make them pay you a monthly dividend. They may not happen to have fat premium, but even 1% per month would add considerably to your returns, wouldn't it? As I've noted above, professional money managers sell calls almost continuously against portfolio stocks; even getting 1/2% per month would add 6% or better annually to their fund results. And they average better call writing returns than that. If the pros do it - and they do it religiously - why aren't individual stock investors doing it? Writing call options on your portfolio forces the stocks to pay you a monthly dividend.

Don't want t o l ose your st oc k? Some investors hesitate to write calls on portfolio stocks for fear of having the stock called away. If you 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 called out. If the stock is trading in a price range, write calls at the range tops as the stock begins to fall; then buy them back for a profit as the stock falls. How hard is that?

Did you know you c an prot ec t apprec iat ed st oc k? Sadly, investors often watch stocks actually appreciate in price – they guessed right – only to see the stocks fall again, either in a natural trading rhythm, or with a market decline, or with a decline in the industry's fortunes. Yet, no one wants to sell the stock at a high. After all, it's an investment and it could go even higher! Actually, there is a simple technique for protecting the gain in value. Purchase a longerterm put option (put), which gives you the right, but not the obligation, to sell the stock at a fixed price for the put’s life. Then write calls every month, or if you don’t wish to be called out of the stock, write them as opportunity arises. The purpose of this technique is not so much to generate an income but to use the stream of call-writing income to pay the cost of the protective put.

14


For example, if you bought stock at $36 and the stock is now $80, you could purchase an $80-strike put with an expiration date as far out in time as 2.5 years. The put gives you the right anytime during its life 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 $ 3 3 p ro fi t ($80 put strike - $47 stock price). The put 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…

Keys to Call-Writing Success 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: c o m m o n se n se . The successful investor looks for strength, and call writers are no exception. We want stocks that are stronger than the average, no matter what the market is doing. We also prefer strong industries, because even a company showing strength will do better if it is in a strong industry. In every investing and trading strategy, 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 smart income 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 good trade selection that we are looking for strength and consistency. Covered call writing is mostly about strong fundamentals, but the stock chart plays a role, as well. The chart is not sufficient justification to place a trade, but often keeps us out of trades.

T he fundament al s rul e. Fundamental information (earnings, dividends, etc.) is important, and we rely heavily on it in writing covered calls - and you should, too. The savvy call writer looks for the best stocks in the best industries in the 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 those stocks with just so-so fundamentals. But assuming the fundamentals meet your criteria, they don't tell you when to get in - or when to avoid - a stock.

T he Chart : st oc k pric es are not random. 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 had always 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 were random, it would be almost impossible to make money in the market. Prices have no memory, but people do. Thus the chart plays a role in consistently successful investing. If the chart showed a stock clearly poised on the brink of disaster, would a rational investor buy it for call writing or any other purpose? Of course not. Chart analysis also will determine whether the stock should be written in the money (ITM), at the money (ATM) or out of the money (OTM).

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T he Cal l Writ er Met hod The CallWriter method is simply the rational combination of common sense and experience. Our approach to covered writing boils down to this: · · · ·

Select v ery high quality stocks (ones you'd be willing to own); T hat offer high call premium; and Are not expecting major news. Deploy the Superput, if risk limitation is desired.

We’ll get to the details in a moment, but notice how these concepts work together. Why would any investor want anything other than high-quality stocks? And why would anyone seek low call premium (unless writing calls on a stock you happen to already own)? Who is looking for less income? And we avoid stocks with potentially catastrophic news coming, as well as those that are obviously failing or about to fail, as evidenced by the chart. This is just common sense – CallWriter sense.

Covered Call Trade Selection Here are the basic tenets of conservative stock selection for covered call writing. While it is possible to get away with sloppy trade selection in bull markets, consistently successful income investing is best achieved by avoiding the lousy stocks and sticking with quality stocks. Simply writing stocks based on returns, without regard to fundamentals, is asking for disaster. You must be a sniper, not a machinegunner. Let me warn you: few who teach or promote covered calls go nearly this far. The further you get away from these criteria, the better your trade management skills had better be…

FUNDAMENTALS: 1. Y ou must be willing to own the stock. This is a good litmus test of whether you really believe in your fundamental analysis.

2. Bigger really is better. Fact: the smaller the company, the riskier it is; the more ways it can go wrong. Stick with the large-cap industry leaders or the mid-cap companies (above $2 bln. in market capitalization).

3. P rofitable, with a dash of strong earnings growth. Unprofitable companies are poison in unprotected covered calls. Look not only for earnings but also for consistent earnings and consistent earnings growth. The market loves and respects these the most, and so should we. Steady and growing dividends are a very good sign.

4. T he company is not ov erv alued. Companies that are highly overvalued are riding for a fall. A P/E (price to earnings ratio) over 50 is worrisome, since the higher they fly, the further they can fall.

5. T he stock is not highly v olatile. The less historically volatile the stock, the less likely it is that you will have problems, and viceversa. Only the most experienced call writers should undertake volatile stocks.

16


6. Stock Volume: The average daily volume should be at least 1,000,000. More is better.

7. High Open I nterest: Look for open interest of at least 2,500 contracts. This is the number of option contracts currently outstanding.

8. No major ev ent is pending before option expiration. Sometimes premium gets extremely high – much higher than historical price volatility would warrant – based on major news coming. Be very careful with these. Newer traders are well advised to avoid them.

9. T he industry is also strong. 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 being undertaken. 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 maximize returns by maximizing the quality of our trades, not by maximizing premium. CalWriter offers many lists of large, highly conservative stocks (S&P 100, Nasdaq 100 and S&P 500 stocks), which allows our members to stay focused on the best large companies and the best mid-cap companies. But while fundamentals rule, the chart plays a role in trade selection, too. Who would choose to stand under a falling piano? Here’s how to avoid that piano…

THE TECHNICALS (the Chart) 1. T he stock must be at least as strong as the market. Whatever the market is doing, we do not want a stock weaker than the market.

2. Good price performance by the industry . When the industry is performing well and price is rising (buyers coming in), even so-so stocks tend to do quite well. If the industry is struggling, your stock will have to fight that weakness.

3. L ook for stocks in an uptrend. Even in a bear market, there are advancing issues, though not so common. But if the market is declining, nonetheless look for charts stronger than the market. Declining stocks should only be written with our SuperPut strategy.

4. T he stock should not be testing or approaching resistance. When a stock hits a resistance level, the most likely result is another failure and retreat. Catch a rising star, not a falling knife.

5. A recent test of support is a good thing. It is a good sign that the stock recently has tested support and is rising, whether the stock is continuing in an uptrend or is moving in a wide range.

6. Make sure that mov es happen on v olume. Trading volumes should confirm price movements, especially reversals.

17


7. Mov ing av erages logic: The stock is above the 50-day moving average and the moving average line is rising or at least flat (not curling down). In a declining market, it is not below the 50-day average. Sometimes the 100- or 200-day average will make more sense, depending on various factors.

8. T he highly v olatile stock. Stocks that show high volatility, such as gaps up an down and frequent wide-ranging days, are not good call-writing candidates.

9. High Relativ e Strength – but only if fundamentals are great. Relative Strength (RS) is a measure of how the stock performs compared to an index. High RS can be a good thing if fundamentals are great and valuation is not too high.

10. Be wary of price spikes. Many times a stock will spike far above support, frequently on news or anticipation. These spikes frequently pull back, so don’t write than until the stock has clearly established that it is now trading 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 a chart, and not doing so means ignoring key data that can keep you out of bad trades. Granted, if you write a great company, you are not as concerned about a price decline, but conservative covered call writers don’t go looking for the "falling piano" trades.

EARNINGS: You must be careful if earnings will be reported before expiration. If the stock has run up in price on anticipation, it might sell off, no matter what earnings are. And if negative guidance is issued for future quarters, good earnings for this quarter will be ignored as the stock sells off (and lowered guidance dims the fundamental quality of the company). Look for earnings preannouncements to see if the company has hinted 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.

N E WS: When premium is sky-high, it is important to look for news, since something is driving premium so high. 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 or biotechnology company. On these, it is imperative to check for pending news. These types of companies can suffer catastrophic sell-offs on bad news, such as failure to get FDA approval or poor clinical trials results.

18


Th e W r a p - u p : Some believe that this process is too cumbersome, too slow, too much. But our members have had great success with it over quite a few years, in every kind of market. And it does an exquisite job of keeping 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 sterling CallWriter 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 ruthlessly and quickly winnow through lists of trades, discarding the pretenders and time-wasters, and focusing on the ones that matter – the quality, conservative trades. In fact, CallWriter makes it easy and fast to research this information, because all the information you need to make fundamental and technical assessments on the stock are integrated into our famed Research Page, which opens right from the Real Time ListsTM.

*

*

*

I also promised to show you how to invest with covered calls while covering your backside (downside risk), 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 with covered call writing: the Su p e rPu t trade.

The CallWriter “SuperPut” CallWriter's family of Su p e rPu t lists presents something new in covered call lists: covered call trade candidates with a long-dated protective put added to protect the stock's downside. The buy-write covered call trade is built like this:

Covered Call

=

Long Stock – Short Call

What is a SuperPut ? Because the covered call involves a long stock position, the danger posed to the writer is a sell-off in the stock. The best protective measure to define and limit risk in a covered call trade is to buy a longterm protective put when the trade is placed (known as a married put when the put is bought at inception), which I refer to as a SuperPut trade. The SuperPut position looks like this:

Covered Call

=

Long Stock – Short Call + Long Put

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 a protective 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 in time and the puts are extremely cheap in comparison to current-month call premium. Why do I call it the SuperPut? Because the trade involves a long put that does a super job of protecting the underlying stock against a sell-off. These trades really are SuperPuts. We also refer to them as Protected Buy-Write (PBW) trades.

19


A S a m p l e S u p e r Pu t T r a d e Our goal in the following illustrative L e h m an Bro s. Ho l di n g s (L E H) SuperPut trade is to generate a good income stream from the sequential writing of calls, month after month, after recouping the put cost. LEH has been volatile heretofore, as have all the big brokers in the summer of 2007. This volatility is likely 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 volatility means that 1) premium is likely to stay high, and 2) movement in the stock price will create opportunities to 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 cost going 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 in call premium are just that - projections - but the table below assumes a conservative level of call premium for succeeding months. There is good reason to think that high premium levels will continue in brokers such as LEH for some time, until the problems besetting them resolve.

Put t ing on t he T rade 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 $ 3 .2 0 in premium (all time value), and for protection buying the Apr-08 $55 Put for $ 6 .7 0 . The Apr-08 55 Put guarantees that, for the life of the put, 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 $ 0 .83 per month. The trade costs $ 5 8.3 3 per share to put on (54.83 - 3.20 + 6.70), or $29,165 for 500 shares.

SuperPut Trade Example - LEH Months

Lehman Bros. LEH = $54.83 Buy stock Write call options Buy Jan-08 Put Net Debit Return on Original Trade Debit (58.33)

Maximum Risk

(1) SEP 55 Call

(2) OCT 55 Call

(3) NOV 55 Call

(4) DEC 55 Call

(5) JAN 55 Call

(6) FEB 55 Call

(7) MAR 55 Call

(8) APR 55 Call

54.83 3.20 6.70 58.33

2.00

2.00

2.00

2.00

2.00

2.00

2.00

56.33

54.33

52.33

50.33

48.33

46.33

44.33

5.5%

8.9%

12.3%

15.8%

19.2%

22.6%

26.1%

29.5%

- 3. 33

- 1. 33

+ 0. 67

+ 2. 67

+ 4. 67

+ 6. 67

+ 8. 67

+ 10. 67

Notice first of all that the 8-month protective put costs barely more than twice the amount of currentmonth premium received. While anyone can buy a long-term put to protect a covered call trade, our lists of 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 huge additional profit of $5.00 per share if the stock were called out. But this is your choice to make; you get to decide how much premium to pull in and how much upside you want in the position.

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SuperPut I nc ome St ream 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 a clear profit of 18% for eight months; a 27% annualized return. And 5.7% ($3.33) was the maximum possible 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 the return 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 upon assignment. With a volatile stock the returns could be far greater than assumed in the LEH table above. However, it is important to see how the trade works in conception. Note what the SuperPut trade construction accomplished: · · · ·

G e n e rat e d a fi n e i n c o m e st re am fro m w ri t i n g c al l s; L i m i t e d t o t al ri sk t o o n l y 5 .7 % o f t h e am o u n t i n v e st e d; M ade a fal l i n st o c k p ri c e so m e o n e e l se ’s p ro b l e m ; Po si t i o n e d u s t o k e e p g e n e rat i n g p re m i u m i n c o m e n o m at t e r t h e st o c k p ri c e .

Max imum Risk Note in the above LEH trade how, in the third month of the trade, the position becomes riskless as to any downside price move and goes into guaranteed profit. The long put limits our risk, because for the eight-month life of the put, we can sell the LEH stock at $55. But notice that the risk soon goes to zero. At the time of trade entry our maximum risk - the largest amount we can lose even if the stock goes to zero is $ 3 .3 3 , or $1,665.00. The second month's call write for an assumed $2.00 lowers the maximum possible loss to $ 1.3 3 , or $665 on 500 shares. The third call write at $2.00 makes the trade riskless against a downside stock move. Wouldn't it be lov-er-ly to have your risk limited like this?

Advant ages of t he SuperPut T rade

1.

Call-Writing I ncome: Write calls for income, month in and month out.

2.

Call-T rading I ncome: Buy calls back as the stock falls, pocketing extra profit, sell them again as it moves up.

3.

T he Stock is P rotected: Isn’t this what every investor wants, protection against a sell-off?

4.

We Show Y ou Only the Cheap P uts: The put is usually 1.5 to 2.5 times the current-month call premium, and only we have them.

5.

Risk is Strictly L imited: The maximum SuperPut risk will always be 10%, and often much less.

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6.

Know the Maximum Risk Going I n: Isn’t it nice to know the worst case right from the beginning?

7.

Great in Flat and Ev en Bear Markets: When regular investing holds, income investing with covered calls shines all the brighter. This strategy is the perfect bear medicine.

8.

Great on Volatile Stocks: Volatile stocks are not conservative choices for covered calls, but you can use them with the SuperPut strategy. Those who like to trade especially like these.

9.

T urns the Downside Risk into Someone Else's P roblem: Wouldn’t it be great to know that a catastrophic stock collapse isn’t your problem?

1 0. T he T rade Soon Becomes Riskless: Once the cost of the protective put is recouped, every dime of premium is pure profit and there is no longer any exposure to a price collapse.

Peerl ess Bear Medic ine Is the SuperPut the perfect trade? No, there is no such thing. But it allows regular income generation free of fear that the stock will collapse. It also means that you can write covered calls with im punity in a bear market, because a stock declining with the market is n o l o n g e r y o u r p ro b l e m – it's a problem for someone 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.

Real Dividends Writing 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 1.5 % to 5 % annually. This may not sound like much, but when stocks are held for the requisite period under the tax laws, dividends are taxable - as I write this - at a tax rate of only 15%. Holding stocks for months, as in our SuperPut strategy, can result in extra, tax-advantaged returns from dividends on your stocks.

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Compounding Your Profits “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. But those who prefer to build wealth can do so quickly by compounding – meaning to take the net investing income stream and turn it into new trades. As the premium stream rolls in every month, it can be put into other trades. The LEH SuperPut table above makes no attempt to show the result from compounding premium income by placing it into new SuperPut trades. Bankers refer to it as "turning" capital. As payments come in on loans, bankers lend the money 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 history were built precisely on turning money. The table below shows the results of achieving a consistent return of 3 % monthly and compounding the returns. Column (1) assumes no tax is paid on income, as in a taxadvantaged account as an IRA, and column (2) shows the results if paying income tax of 30%:

Table 1: Covered Call Writing Annual Compounding Tables – 3% Monthly Start with only $25,000 (1) IRA – No Tax

(2) 30% Inc. Tax

Start with only $50,000 (1) IRA – No Tax

(2) 30% Inc. Tax

1

35,644.02

32,450.82

71,288.04

64,901.64

2 3

50,819.85 72,456.96

46,267.10 65,965.83

101,639.70 144,913.92

92,534.20 131,931.66

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

8 6 7 ,7 7 4 .6 8

7 9 0 ,0 3 4 .1 8

1,735,549.36 1,580,068.36

Wow! Imagine being able, in only 10 years, to turn $25,000 into nearly $900,000, or $50,000 into over $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 average return of 3% monthly, and many CallWriter members do far better than this over time.

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Table 2 below shows the much greater results from averaging a 4% monthly return and then compounding investment profits, again starting with only $25,000 or $50,000:

Table 2: Covered Call Writing Annual Compounding Tables – 4% Monthly Start with only $25,000 (1) IRA – No Tax

(2) 30% Inc. Tax

Start with only $50,000 (1) IRA – No Tax

(2) 30% Inc. Tax

1

40,025.81

35,518.06

80,051.62

71,036.12

2

64,082.60

56,865.56

128,165.20

113,731.12

3

102,598.31

91,043.60

205,196.62

182,087.20

4

164,263.21

145,763.74

328,526.42

291,527.48

5 6

262,990.69 421,056.56

233,372.44 373,636.80

525,981.38 842,113.12

466,744.88 747,273.60

7

674,125.12

598,204.55

1,348,250.24

1,196,409.10

8

1,079,296.03

957,744.76

2,158,592.06

1,915,489.52

9

1,727,987.72

1,553,380.22

3,455,975.44

3,106,760.44

10 2,766,564.02 2,454,991.13

5,533,128.04 4,909,982.26

Great Scott! We're talking about turning $25,000 into $2.7 million, and $50,000 into $5.5 million. You don't have to be genius like Albert Einstein to see the magic of compounding. Though it seems improbable, the numbers don't lie. Look at the level of returns possible in just 10 years of simple, repeatable monthly income investing. No one can promise you that you will achieve these returns. However, many of our CallWriter members advise us that they have been realizing consistent monthly returns of 4 % and 5 % over the years. The consistency of your returns will depend on the consistency of your decisions. But the returns are there to be had, in up markets and down. The compounding tables above do not include trade commissions, which will vary based upon the commission levels you pay and the number of contracts you write. However, the tables also do not include di v i de n ds, which are taxed at only 15% as this is written, provided the holding period is met. The tables also assume that every penny in the account is being traded at all times, which will not always be possible. Obviously, compounding grows wealth faster if investing is done within an IRA or other taxadvantaged or tax-deferred account. But even after giving approximately 30% of your investing income annually to your "uncle" in Washington, covered call writing can produce re al w e al t h .

How to Write a Covered Call The covered call trade starts with the trade order. Few people seem to know the most advantageous way to place a covered call trade, and it is my privilege to share it with you. Let’s assume we want to enter a position in Cisco Systems (CSCO) when the stock price is $19.75 and we can sell the May-$20 Call for a premium of $1.25 per share ($125.00 per contract). We will place the order as a buy-write in which the stock will be bought and the calls sold simultaneously, assuming that 30 days remain until expiration.

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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 n e t de b i t o rde r. 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 to place the trade – our price limit. If we place the order for 500 shares (5 contracts), our maximum debit to enter the position will be $9,250 (500 x 18.50).

B u y -W r i t e O r d e r - C S C O Buy No. of Shares Asked Price: Sell to Open: No. of Contracts: Bid Price: Net Debit Quoted: Order Type: Duration:

Opening

CSCO shares 500 19.75 CYQED – May 20 C 5 (500 shares) 1.25 18. 50 Net Debit 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 let’s use the order form to place the trade, using an order entry form specifically designed for covered call trades, which many online brokers (e.g., optionsXpress.com) now offer. We will place the order at $18.40 instead of $18.50, and we’ll 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

Stock Symbol

Action

Quantity

[

CSCO ]

[x] Buy [ ] Sell

[ 500 ]

Option Symbol

Action

Quantity

[

[x] Sell to Open [ ] Buy to Close

[

CYQED ]

Price

[ ] Market [ ] Limit Net Credit [x] Limit Net Debit

5

]

[$ ] [$ 18.40 ]

Duration

[x] Day Order [ ] Good Until Canceled

Advance d Orde rs

[x] None [ ] Contingent Order

Notice that our order balances: 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 and were selling them, an order would be placed to sell them to close. Once the order is filled (executed), we will be long the CSCO stock, and short the CSCO May-$20 Calls. Assuming the order is filled, our total net debit in the position is $ 9 ,2 0 0 (500 x 18.40), which saved us $50 compared to a fill at $18.50.

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Cl osing t he T rade Earl y Now let’s assume that we have been in the CSCO trade a few days and it has become possible to close the 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 sell the 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 n e t c re di t o rde r, which specifies the minimum amount (the credit) we will accept. If we enter an order at market prices, we would place the net credit amount as $ 19 .2 0 , but a higher amount can be entered:

B u y -W r i t e O r d e r - C S C O Sell No. of Shares Bid Price: Buy to Close: No. of Contracts: Asked Price: Net Credit Quoted: Order Type: Duration:

CLOSI NG

CSCO shares 500 19.85 CYQED – May 20 C 5 (500 shares) 0.65 19. 20 Net Credit Day

In order to pick up a little extra on the trade, let’s enter it at $ 19 .2 5 instead of $19.20. Remember that our debit in this hypothetical trade is $ 18.4 0 , so our final profit will be that amount subtracted from the net credit we receive. We specify in the order form that we are selling the 500 shares and buying back the call contracts to close, and we enter the $ 19 .2 5 credit amount; we enter the trade as a day order again.

Covered Call Trade Order Form

CLOSING the Trade

Stock Symbol

Action

Quantity

[

CSCO ]

[ ] Buy [x] Sell

[ 500 ]

Option Symbol

Action

Quantity

[

[ ] Sell to Open [x] Buy to Close

[

CYQED ]

Price

[ ] Market [x] Limit Net Credit [ ] Limit Net Debit

5

]

[$ 19.25 ] [$ ]

Duration

[x] Day Order [ ] Good Until Canceled

Advance d Orde rs

[x] None [ ] Contingent Order

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Once this order is processed and filled, we will have closed this position and sold the CSCO shares for the net amount of $ 19 .2 5 (or $ 9 ,5 2 5 .0 0 ). Because we paid a net of $ 18.4 0 on trade entry ($9,200.00), our net profit is $ 0 .85 per share (19.25 – 18.40), for a $ 5 2 5 .0 0 profit for a week. This is a return of 4.6% for a week. This is a classic buy-write: we buy the stock and write calls against it. This is also a classic, and fairly common, way to close trades early for a nice profit with plenty of time left to find another trade before the option month's expiration. This was a nice return, indeed. But notice how $ 0 .15 of that return came not from market price quotations but from simply leaning up the entry order and slightly fattening up the closing order. While $0.15 may not seem like much, it was a meaningful percentage of the eventual $0.85 profit.

I f We Didn’t Cl ose t he T rade Earl y: The result if the stock was called away: When we put on this trade, there were 30 days remaining until option expiration. If CSCO had been higher than $20 at expiration, our shares would have been called away at the $20 strike price. When the stock is called away at $20, we pick up an extra $0.25 in profit, because we originally paid $19.75 for the stock. If called, our return would have been $ 1.6 0 , or $ 80 0 , for a return of 8.7 %, nearly twice the return for 30 days, compared to closing the trade after one week. Though the return is certainly higher, the rate of return is lower – 8.7% for a month, versus 4.6% for a week. Here is how profit is calculated: Sold stock $20.00 Net Debit $18.40 Pro fi t $ 1.6 0

$10,000.00 $ 9,200.00 $ 80 0 .0 0

But what if the stock was not called away? If the stock had remained perfectly flat at $19.75 and we had sold the stock at expiration for that price, then our return would have been the $ 1.2 5 in premium we originally received, or $ 6 2 5 . Did you notice how you’re also learning how to compute the returns in covered call trades?

What if the CSCO stock was down at expiration? This happens sometimes. You can always close the trade for a loss, or a smaller profit. But unless CSCO seems in danger of collapsing, there is no reason to panic. Instead of taking a loss if the stock is down, why not keep writing calls on a great stock in order to continue generating income? In fact, there is a wealth of information on the CallWriter members’ site that teaches you how to react to dropping stocks in order to manage the trade most effectively. There also is great information on how to squeeze more profit out of rising stocks, and our proprietary T rade M an ag e m e n t C al c u l at orTM shows you where the most profit is in the trade all the way through, from entry to close.

Writ ing Port fol io Shares Had we already owned the CSCO shares, then instead of placing a buy-write order, we would simply have sold calls against the shares using an order to sell straight options. Your broker does not care if the trade is a buy-write or an overwrite (writing against portfolio shares), but only cares that the calls you sell are covered. To close the call position in this case, we would just have entered an order to close the short call position. When writing calls, we can sell calls on all the shares we own, or just some of them, which is known as partial writing. While you must own enough shares to cover the calls sold, you don’t have to write against all the shares owned.

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Smart Money Management All investors, covered call writers included, must practice good money management. The first line of money management is to invest conservatively. Trade selection is about 7 0%, perhaps more, of the entire covered call writing game. It's that important. Garbage in, garbage out.

Making t he Al l oc at ion First, d etermine 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 call writing. 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-trade dollar allocation determines the number of trades you can buy and write against in each position. Where you are only allocating for a few trades, the more conservative and liquid the stock must be. I personally find more than 10 covered call trades at a time unmanageable.

Commissions and Orders Watch commission costs and don't overtrade, especially with low number of contracts. Be sure to use an online discount broker, because the more expensive brokers give no better execution. Especially where commissions are high, run at least 3 contracts (300 shares) per trade; get the commission costs per contract down. For this reason, many investors with smaller accounts use the no-frills brokers like TradeKing and Interactive Brokers, which charge much lower commissions, but also offer little in the way of services and tools compared to the more fully-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 are having trouble getting orders filled, they are obviously too fat. Regarding market orders, only use them for a hasty exit out of a dangerous position, because they will pick your pocket.

Managing Risk In case I have not said it enough, use conservative stock selection procedures. Diversify into different sectors to reduce your exposure to a sector that goes into rotation (sells off). Plan each trade to take advantage of what the stock is showing you. For example, don't write an out-of-themoney call unless bullish on the stock. Always write the current-month or next-month calls in order to maximize premium income per month, unless you have a strong reason for writing a longer-term call. Pay attention and manage trades advantageously, but don't day-trade options. If you are unable 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 better to buy a multi-month protective put than to figure out how to repair a trade gone wrong.

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

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TM

CallWriter’s Real Time ListsTM 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 ListsTM. These great lists, conveniently divided by price, quality, call strike-price and other parameters, are the standard 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 Pro fi t E n g i n e T M software, which continuously looks for the 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, so CallWriter’s lists are the place to start. We offer other gold-standard tools, of course, but we are justly famed for our wonderful lists. All our lists are web-based, so there's no software to download!

C Co ovveerreed dC Caallll L Liissttss -- 55 EExxppiirraattiioonn M Moonntthhss Conser vative Lists (3) All-M ar kets Lists (4) Deep Str ikes (4) Phar maceuticals (1) Low Volume Stocks (1) Exchange-T r aded Funds (1) S Sp peecciiaallttyy L Liissttss -- 22 EExxppiirraattiioonn M Moonntthhss Naked Put Lists Super Put Lists 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:

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

Stock name, symbol and price Call symbol Call strike used to calculate the returns Call premium (at the time our list was generated) for each return presented Flat return (the return if the stock price does not change) If-called return (the return if the stock is called away) Net debit (the trade's net cost, or breakeven) Percentage of downside protection the premium provides Open interest 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 MADI (moving average directional indicator), a moving average oscillator which shows the 14and 50-day simple moving averages in relation to the current stock price Industry - 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 a trade. And what is not presented here is presented in our proprietary Research Page, discussed later.

Most Conserv ativ e Lists Conservative? Our three index lists represent a galaxy of some of the largest, most established companies 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-traded funds, each of which tracks a specific industry.

Top 30

S&P 100 (OEX) 5 Expiration Months Top 30

S&P 500 (SPX) 5 Expiration Months

Top 30

Nasdaq 100 5 Expiration Months Top 30

Ex change-Traded Funds 5 Expiration Months

The S&P 100 includes some of the strongest, most stable companies on earth - and some of the lowest historical volatilities. Their premiums are not always as high as plays on the other lists, but they tend to be less volatile. The S&P 500 is a leading indicator of U.S. equities, designed to reflect the risk/return characteristics of the large-cap stock universe. The average 500 company is smaller and slightly more volatile than the average S&P 100 company, but tends to offer higher premiums. Returns often are comparable to the Nasdaq 100. These are the largest domestic and international non-financial companies listed on Nasdaq, based on market capitalization. More technology-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. Exchange-Traded Funds (ETFs) are the so-called "tracking stocks" that track market and sector indices, such as the QQQQ (Nasdaq 100) and Diamonds (Dow Jones Industrial Averages). While their volatility can be lower than for individual stocks, returns tend to be significantly lower than options on individual stocks. They also are a good source for bear call and bull put spreads.

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

Top 30

Pharmaceuticals 5 Expiration Months Top 30

Low Volume 5 Expiration Months

These lists present only stocks in the biotechnology and drug industries, including biotechnology, drug delivery, diagnostic substances, drugs and major drugs. Caution is advisable when the company is facing major news such as an FDA ruling or clinical trials results, but the plays on this list do quite well as a whole. These are stocks in which there is either low average daily stock volume or low open interest in the call contracts, thus they tend to be smaller, less-conservative companies. The historical volatility of stocks on this list can be high. While good plays can be found here, approach them with caution.

All-Markets Lists 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

$40 and Up 5 Expiration Months Top 30

$20 to $40 5 Expiration Months Top 30

$10 to $20 5 Expiration Months Top 30

Under $10 5 Expiration Months

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

Stocks priced at $20 to $40 from all U.S. stock markets. These tend to be some of our members’ favorite lists, since the stocks are more affordable. Stocks priced at $10 to $20 from all U.S. stock markets. This list is also highly popular with CallWriter members, due to lower stock prices. Stocks under $10 from all U.S. stock markets. Sometimes more volatile than higher-priced stocks, these lists remain popular due to the low prices, which allow traders with smaller accounts to get in the game.

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

Top 30

Deep in the Money 5 Expiration Months

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

Top 30

Deep out of the Money 5 Expiration Months

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

Top 30

Pharmaceutical Deep in or out of the Money

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

5 Expiration Months Top 30

Low Volume Deep in or out of the Money 5 Expiration Months

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

But as many trades as can be found on our covered call lists, this is only the beginning of the trades that 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, who don’t want to incur the cost of buying the stock. Finally, we offer our amazing new SuperPut lists, which are not only proprietary but absolutely unique in the covered call industry!

Naked Put List s 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 stock at a di sc o u n t , since the put premium received lowers the cost of the stock!

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The following illustration shows the top 10 plays on CallWriter’s 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 Put symbol Put strike Put premium Flat return (the return if the stock price does not change) Return Not Assigned (assumes the put writer is not assigned) Maximum risk (put strike less put premium) Open interest 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 indicator MADI (moving average directional indicator), a moving average oscillator which shows the 14and 50-day simple moving averages in relation to the current stock price Industry - the industry in which the company operates

Ot her Uses for Naked Put List s As I already mentioned, many people sell naked puts in hopes of buying the stock, because the put premium received lowers the cost of the stock purchased. Writing naked puts allows you to buy stock at a discount. People also use our Naked Put lists to find great bull put and bear put spread trades. By clicking open 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:

Naked Put Lists Presented due to subscriber demand, these lists present the highest-returning naked put writes. Return calculations assume that the put write will be fully cash-secured, but do not include any account interest paid on funds that secure the trade.

Top 90

S&P 100 2 Expiration Months Top 90

S&P 500

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

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


Nasdaq 100

Naked put premiums on stocks comprising the Nasdaq 100 index.


ATM Puts

Naked put premiums on puts that are close to the money and may be slightly ITM or OTM.


OTM Puts

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

2 Expiration Months

SuperPut List s In what is definitely an industry first, CallWriter presents several very powerful lists of Su p e rPu t trades that feature high covered call returns, each coupled with a very inexpensive long-term protective 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 stock’s 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 upside move in the stock. Because the maximum risk in the trade is limited and defined, these trades allow a new level of confidence in covered call writing. The Real Time SuperPut ListsTM provide the following information on each trade at a glance, all prices given as of the time the list was generated: · · · · · · · · · · · · · · · · · ·

Stock name, symbol and price Call symbol Call strike used to calculate the returns Call premium (at the time our list was generated) for each return presented Long Put symbol Long Put strike Long Put cost Return Not Called Return If Called Net debit (the trade's net cost, or breakeven) Downside risk and risk percentage (risk from a downside move in the stock) Upside risk and risk percentage (risk from an upside move in the stock) Open interest of the call series (the number of contracts outstanding) P/E Ratio (stock price to earnings ratio Average daily stock volume ADVI, our proprietary volume momentum indicator MADI (moving average directional indicator), a moving average oscillator which shows the 14and 50-day simple moving averages in relation to the current stock price Industry - the industry in which the company operates Following is a description of our SuperPut Real Time ListsTM:

SuperPut Lists A CallWriter innovation, these are high-returning covered call trades in which a longer-term (6 months or more) put is purchased for protection. The puts are inexpensive in comparison to the cost of currentmonth options. Each trade features sale of the call for the current or next expiration month, plus the purchase of a longer-term put. Maximum risk in the trade is limited to 10% of the trade's net debit upon entry. The put allows the generation of a stream of call-writing income for six months or more, if the trade is not closed earlier.

Top 90

ATM-ITM Puts 2 Expiration Months

The calls are close to the money for maximum time value premium; the long puts are either close to the money or one strike in the money.

Top 90

OTM Puts

The calls are close to the money for maximum time value premium; the long puts are always out of the money, which reduces put cost.

2 Expiration Months

By the time you read this report, it is likely that other SuperPut lists will have been added, showing more high-quality trades. The presentation of thousands of trades makes it possible to find acceptable trades by simply going to the list that suits your risk tolerance and experience level.

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CallWriter’s Research Page I nst ant l y Researc h St oc ks Achieving consistently successful results requires doing the requisite amount of analysis and evaluation prior to trade entry. Yet it is also important not to spend unnecessary time on the analysis process – that is, don’t waste time on trades that don’t cut the mustard. My personal analytical process is designed to disqualify poor trades and low-probability trades as soon as possible, so that no more time is wasted on them than strictly necessary. For this reason, I tend to put the initial analytical focus on the deal-breaker factors. If they are not right, I waste no further time on the trade. Clicking on the embedded links in each trade on our lists pulls up the C al l Wri t e r Re se arch Page. Designed by traders for traders, the Research Page allows traders to efficiently and very quickly do the necessary evaluation. From any of the Real Time ListsTM, pull up the Research Page by just clicking on any of these links appearing on the lists: · · · · ·

"T " T rade L i n k – opens up a covered call order form for optionsXpress customers. St o c k Nam e – opens up fundamental research. St o c k Sy m b o l – opens up charts. C al l Sy m b o l – opens a page of covered call chains. Pu t Sy m b o l – opens up put and call chains, or naked put lists.

Researc h T ool s I nt egrat ed Other websites integrate a certain amount of research, but CallWriter integrates a huge number of research pages, each precisely calibrated to a need of the covered call writer. CallWriter members can navigate between all the different research pages described below with a mouse click. Each page retrieved is presented in the same pop-up window, to avoid cluttering your screen with multiple popup windows.

Resear ch: Quotes and Chains Q u o te

Detailed quote on the company.

CC Chains

Covered call chains on the stock from OptionsXpress.com. This page allows you to look at different expiration months and strikes, not just the one(s) appearing on our lists. You can also look at chains for different trading strategies.

Put/Call Chains

Put and call chains on the stock from OptionsXpress.com.

Implie d Volatility

Put and call chains on the stock from OptionsXpress.com that provide the implied volatility of each option series.

Historical Volatility

Provides 10, 20 and 30-day historical volatilities and implied volatilities for the stock.

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Resear ch: T echnical Data Chart

Customizable charts with a selection of indicators and oscillators.

T e chnical Opinion

Blends several different indicators to yield short-, medium- and long-term technical opinions on the stock. No human review is involved, but this is a very popular page with our members.

Resear ch: Fundamental Data Fundame ntals

This page displays a wealth of data on stock performance, key statistics, growth, valuation and profitability, fund ownership, and more - accessed by a pull-down menu.

He adline s

Headlines and press releases from Yahoo affecting the company.

Ke y Ev e nts

Major news items affecting the stock, including earnings and product news.

Inside rs

Shows insiders buys and sells of company stock over the last two years in graphic form, in addition to listing the buys and sells by person. Very helpful for analysis at a glance.

Owne rship

Detailed information about who owns the company and recent buying and selling volume compared.

Company Re port

Presents a very detailed synopsis of many fundamental and technical factors, which makes it easy to compile a picture of the company at a glance.

Earnings

Details the next earnings announcement date. Be sure to cross-check the Key News page for earnings pre-announcements and guidance by the company.

Estimate s

Excellent summation of earnings and forecasts, earnings growth, comparison to industry and much more.

Analysts

Provides the current consensus of analyst opinion, upgrades and downgrades, the trend of analyst opinion and more.

M SN Rank

This page provides the MSN StockScouter rank of the company, plus other valuable information such as expected risk to reward. A more detailed page can be opened from this page.

Industry Finde r

This page reveals the company's industry. Clicking on the industry in turn opens up a list of the stocks in that industry. You can view them on multiple time frames and by fundamental and technical performance. This page allows you to assess the health and direction of the industry, very quickly.

Filings

Puts all of the company's SEC filings at your fingertips. Once a search results page is opened, click on the HTML version of the document.

OX T rade Link

Opens a covered call trade order form, so that OptionsXpress customers can run the trade right from the page. Click on the tabs to change the order form to a collar or to add a protective put. Other links on the OptionsXpress page open order forms for different trade strategies. Note: Use the Collar form to enter a covered call with protective put.

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Researc hing Different T rade Variat ions and Ot her St oc ks The Research Page also allows users to quickly evaluate trades on a stock involving other strike and month combinations. For example, an out of the money trade might appear on the Real Time ListsTM but the user would prefer writing an at-the-money or in-the-money call or put. Users can instantly switch the chain type or chain month to look at the profitability of different strike and month combinations. Stocks not on the lists are easily researched, as well. The fact that the stock has hit CallWriter's lists indicates that premium is high. It is likely that call premium will be high, or at least higher than normal, across the board – all strikes and expiration months. Our research tool, however, lets you see instantly whether there is acceptable (or even more desirable) premium in other strikes or expiration months. This research capability is especially important where the trade presented on the list is not acceptable for one or more reasons. For example, the trade may feature a deeply ITM call on a stock as to which you are quite bullish; in that case, you would want to look at premium for OTM calls in the current, near and next available months. The research page allows you to see, within seconds, whether the stock offers acceptable premium for the strikes and months you seek. Following is an example of a covered call chains page integrated into the Research Page, using Dell, Inc. (DELL) as the research subject. It indicates the ease with which users can instantly pull up covered call chains for other stocks. The chain can be switched to other months, or even other chain types, such as Put, Call and Put and Implied Volatility chains.

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The same research capability exists to look at Put, Call & Put, Collar and other chains from OptionsXpress. Other desirable data inputs, such as news, key developments, earnings, MSN StockScouter® rank, analyst views, insider trading volumes and much more are available in an instant. Stocks not appearing on the lists are easily researched, as well. Once the Research Page is opened, simply switch the symbol to the new symbol desired and click GO. Our SuperPut and Naked Put lists open up different option chains, which likewise can be quickly changed to other expiration months (or to show all available months) and chain types.

CallWriter’s TM Trade Management Calculator Ac t ual l y Manage Open Covered Cal l T rades Another CallWriter innovation, our proprietary – and unique – T rade M an ag e m e n t C al c u l at o rT M allows our members to look at speculative returns on trades being considered, like the covered call calculators available on many websites. But CallWriter’s calculator is far more: it actually allows you to manage open covered call trades for greater profit. It instantly shows you if there is more profit in remaining in the trade or closing it. It also shows in an instant the potential profit from rolling the calls up or down. Nothing else does this, and no other covered call site offers this tool. The following TM Calculator illustration assumes we have run a trade in Lehman Bros. (LEH) on August 29, 2007, buying the stock for $54.83 and writing the Sept-07 $55 Call option (symbol LESIK). We received $ 3 .2 0 for writing the Sept-07 $55 call, which set up a $3.20 flat return (6.2%) if the shares were not called out and a $ 3 .3 7 return (6 .5 % ) if the shares were called. Writing the calls also lowered our cost basis in the trade (our risk) to $51.63. You can see the trade numbers and potential returns entered on the calculator's First Row.

Cl osing t he Posit ion I mmediat el y However, on September 20th , the day before expiration of the September calls, LEH's price had increased to $62.35, and we used the calculator to look at the potential results of closing the trade then or rolling the calls – meaning to buy back the calls sold and sell calls with a different expiration month and/or strike price. On that day, we could have repurchased the Sept-$55 calls sold (for $3.20) for a cost of $ 7 .7 0 . The calculator's Second Row shows us that closing the trade would have yielded an immediate profit of $ 3 .0 2 (5 .85 % ).

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However, closing the trade would have yielded less of a profit than simply letting the shares be called out at the $55 strike price for a 6.53% return – as shown in the First Row. The illustration below compares the results of letting the trade go to expiration versus closing it immediately.

Rol l ing t he Cal l s Out The next question is whether to try and squeeze yet more profit out of the trade by rolling the calls out to the October expiration month. The following illustration is taken from the calculator on the preceding page, with the Third and Fourth Rows marked for clarity, and shows the potential returns from buying back the Sept-$55 Calls we already sold at $7.70 and selling in their place either the: · ·

Oct-$60 Calls for $ 4 .4 0 Oct-$65 Calls for $ 1.85

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Price Comparison 1: Octobe r $60 Calls If we sell the Oct-$60 Calls (LESJL), notice that we will receive $ 4 .4 0 , which increases our cost basis to $54.93 from the original $51.63, but sets up a return in October of $ 5 .0 7 , or 9.82%. If we think LEH is unlikely to go over $65 and hold that price by October expiration, it may make more sense to roll to this $60-strike call. We may not have confidence in a further price rise if the stock is under heavy selling pressure or is approaching a strong resistance level, for instance.

Price Comparison 2: Octobe r $65 Calls If we sell the Oct-$65 Calls (LESJM), we will receive only $ 1.85 , which increases our cost basis to $57.48 from the original $51.63. If the stock remains flat, we would realize a return in October of $4.87 , or 9 .4 2 % . However, if the stock is above $65 at October expiration, we will be called out at the $65 strike price and realize a whopping profit of $ 7 .5 2 , or 14 .5 7 % . While the return if called out is huge, we will only receive that if the stock goes above and stays above $65 at October expiration on October 20th .

Updat e Pric es Aut omat ic al l y or Manual l y Our TM Calculator will instantly update prices for you with a click of the update [U] button on each row. You can also look prices up and update them manually by clicking anywhere on the calculator's righthand side. Best of all, our TM Calculator holds 24 separate covered call positions. Our TM Calculator cannot tell you what to do, but it does show you where the money is!

Managing a Dropping Trade St oc ks Don't Al ways Go Up Let's assume that the above position, in which we wrote the Oct-$55 Call, was closed when we were called out of the stock at $55, yielding a $3.37 profit, a 6.53% return. Then we decide to write LEH again when the stock is a bit higher. In the following example, we put on a new LEH trade on October 2, 2007, by purchasing the stock again at $64.35 and writing the Oct-$65 Call for a $ 1.6 5 premium. This trade sets up a potential flat return of 1.6 3 % and an if-called return of $ 2 .2 9 , or 3 .6 5 % . Our cost basis in the stock at this time is $62.71. Though not sky-high returns, only 18 days remain until option expiration on October 20 th , just 2.5 weeks, which equate to 2 .7 1% and 6 .0 8% returns, respectively, for a full month. But the stock began to drop in mid-October. Let's use the TM Calculator to take a look at possible trade management options on the afternoon of October 16th . At this time the stock was $61.67, and it would have cost only $ 0 .15 to buy back the Oct-$65 calls sold. Closing at these prices, however, would result in a loss of $ 1.19 per share, as shown in the Second Row of the calculator. But LEH is a good company, though beset by subprime and other woes at the time, and there is little reason to bail out of the trade with a loss. Then we look in the Third Row at the possible results of rolling the calls down and out to November calls. We could sell the Nov-$60 Call (LESKL) for $ 3 .85 , which would lower our cost basis in the stock to $59.01 and give us some extra protection against a further price slide. This roll would result in a $0.99 profit ( 1.5 8% ) if we are called out at the $60 strike price. If the stock is above $60 at assignment, we could simply allow the shares to be called out or take other action. But notice what has happened with this management move: we would actually pull a p ro fi t out of a stock down nearly $3 in price.

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So in the Fourth Row, let's take a look at a further possible roll down and out to the Nov-$55 call (LESKK), which would bring in $ 7 .6 0 of premium. But if we are called out at the $55 strike price, we will suffer a small loss of $ 0 .2 6 per share, a loss of less than half a percent. On the positive side, this roll would reduce our cost basis in the shares to $55.26, which might be advantageous if we were concerned that LEH will continue its price slide. The following TM Calculator illustration shows the above transactions:

This is the power of effective trade management, and our amazing TM Calculator! Is it necessary to manage every trade, like the one above? No. The LEH Oct-$65 calls could have been allowed to expire worthless and new calls could have been written for November. But isn't it nice to see your options clearly laid out for you?

Be sure to print out this Special Report for future reference!

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Special Report Wrap-Up Final l y, a Spec ial Report t hat is Not Al l Sal es Fl uff… I promised you that this Income Investing Special Report would not be lot of sales fluff. In this report, I have given you some pretty valuable information on covered call writing. Think about it: I've shown you the basics of: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

Call options and writing covered calls; Writing portfolio stocks; Locking in profits on appreciated portfolio stocks; How to place and close the trade; Profitable and savvy order-entry; Finding and selecting covered call trades; Fundamental and technical analysis for trade selection; Limiting your risk with SuperPut trades; Covered call money management; Calculating covered call returns; How to manage trades with our amazing TM Calculator; How to pull a great income out of dropping stocks. Assorted miscellanies of investing wisdom.

Though I haven't gone much beyond the basics (well, trade management is a bit beyond the basics), I can honestly say that I have bought covered call e-books over the web for $100 that teach less than this Special Report. I trust you have found it useful and intriguing.

I f t he Spec ial Report is t his good, what ’s t he Cal l Writ er websit e l ike? I've shown you statistical proof that covered call writing beats stock investing and provides a great income, and you've seen the power of compounding your investment profits. You’ve also learned the secrets of conservative call writing and limiting your risk to a few percent of each investment. I want you to think about one thing: if CallWriter gives this much valuable, usable information away for FREE, how powerful is the education that is available right on the CallWriter website for all our members? The answer is – it is i n c re di b l y p o w e rfu l . However, nothing I say can really convey the p o w e r, the u t i l i t y and the p ro fi t ab i l i t y of the CallWriter members' website. You simply must see it for yourself… But enough palavering, as they used to say in the old cowboy movies (where did they go?), let’s get down to cases. I have a powerful offer for you and some very valuable - and very cool - free gifts for trying CallWriter.

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Why CallWriter? Here's What You'l l Get Wit h Cal l Writ er Membership: But nothing can really convey the power, the u t i l i t y and the p ro fi t ab i l i t y of the CallWriter members' website. Again, here is what you get 24/7 online access to as a CallWriter member, with no extra fees or add-ons: · · · · · ·

A l l t h e Re al T i m e C o v e re d C al l L i st sT M Ou r Nak e d Pu t an d Su p e rPu t L i st s Un l i m i t e d u s e o f o u r T r a d e M a n a g e m e n t C a l c u l a t o r T M A w e al t h o f fre e e du c at i o n al m at e ri al s Fre e i n v e s t i n g T e l e L ab c al l s an d p re s e n t at i o n s Fre e E x c e l t rad i n g s p re ad s h e e t s t o d o w n l o ad

I f You've Seen t he Rest , Now T ry t he Best Sure, there are other websites out there serving the covered call market. Some offer lists and some offer a scan, but none of them show you as many great covered call trades as CallWriter's Re al T i m e L i st sT M. Few, if any, will give you Nak e d Pu t l i st s. And no one else offers Su p e rPu t l i st s, which anyone concerned about a bear market and about protecting trades should be doing. None of them offer anything remotely comparable to our T rade M an ag e m e n t C al c u l at o rT M – makes you wonder why they don’t have such an incredible tool, doesn't it? No other covered call site in the world offers the wealth of e du c at i o n – free – that you will find right on CallWriter every single day.

I nvest wit h Confidenc e Using CallWriter's lists, tools and method means investing with confidence, fishing with the right worm every month. And using our SuperPut strategy means no more gut-wrenching decisions. No cringing at the morning’s headlines. No jitters about gurus’ clashing advice and self-serving stock pronouncements. No more hugging the wall because you don’t know what to do, missing out when everyone except you seems to be making money!

Prot ec t First , Profit Sec ond Our extremely conservative approach is just what your hard-earned money needs. And our SuperPut strategy gives you protection— protection and the confidence that goes with safety. You’ll be protected, because you’re never again exposed to the risks of a large loss in any stock, while preserving your ability to generate a fat monthly income. You’ll be protected, because when this bull market ends – and it will – because a decline in the market or in your stocks will be someone else's problem. They say to watch out for a bear market, but when you use our SuperPut strategy, the bear market had better watch out for you! You’ll be protected because your investment income, compounded over time, will put you in the financial position you want to be in, living in the style to which you want to become accustomed. And if you're retired, our method will allow you to generate a marvelous cash flow to live on.

If CallWriter sounds like your cup of tea, I've made it very easy to give my website a try, and I'll throw in some absolutely smashing bonuses to make it even more worth your while! 44


What CallWriter Members Say: Here are c omment s by ac t ual Cal l Writ er members: CallWriter members have had some wonderful things to say over the years. They tend to be direct and to the point, like CallWriter itself: “I am very pleased with your product - it has made me money and definitely is a contributing factor in my decision to retire early. I would like to pay for an annual subscription at my next bill date in December using same credit card.” T. Cartwright “John, have already used the site to good advantage -- your screens have led me to several (actually over a dozen) trades that I otherwise would never have heard of, much less been able to analyze. Only wish this type of pre-screening had been available to me when I was a broker!“ J. Davis “I just started with your service and am finding it very good. I have been doing buy writes for about 15 years now and your service is the first real help I have seen.” P. Barker “Your site radiates street smarts rather than mindless and almost incoherent repetition of option trading bromides so prevalent elsewhere. Please keep up the extremely good work.” Fred C. “Thanks again John. Great web-site, great service, great example of "Knowledge is Power" translates to "Learning is Profitable!" Sincerely, F. Huber “I've been using your system for the past eleven months and have averaged better than 4% returns per month.” S. Chanzes “Hi John...I have been a subscriber to your newsletter over a year now and with this under my belt, I feel that I have a bit of authority to offer my perspective. During this year I have had some nice returns on my investments and some really lousy ones. I keep close records of what I do and I have discovered that, without exception, the trades that turned out poorly were ones in which I did something that was contrary to the advice you give in the instruction pieces!” B. Bates “John: One other compliment. Your educational material is clearly stated, helpful, and literate, all unusual in the IT and financial industries.” J. White “Dear John, you're my hero. Don't ever let yourself think that your work isn't important. Many people like myself are blessed financially because of your effort. There's a lot of bad information out there, but yours is sound advice. Remember that what you do matters.” J. Baron "I have been happy with my CallWriter results! I deposited $5500 and in the 4 months since, the account has grown nearly 20% - just $37 shy of a $1000 increase." Ben W. "I have been a long time subscriber and have used the info on the lists for many trades. I average about 5% per month on my money with covered calls, which I am extremely happy with. Thanks again for the upgrades and keep up the excellent work." D. McAlister "I have been successfully using your covered call system for a few years and it works well in a rising market, flat market, and even a choppy market." D. Strohl “I've researched every CC site I could find and you top the list for reality as I have previously experienced it......your site and newsletter confirm so much of what I went through in 2003. I appreciate the absence of smoke and mirrors......so refreshing." A. Morris

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Joh n Brash er’s

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A l l t h e Re al T i m e C o v e re d C al l L i st sT M Ou r Nak e d Pu t an d Su p e rPu t L i st s Un l i m i t e d u s e o f o u r T r a d e M a n a g e m e n t C a l c u l a t o r T M A w e al t h o f fre e e du c at i o n al m at e ri al s Fre e i n v e s t i n g T e l e L ab c al l s an d p re s e n t at i o n s Fre e E x c e l t rad i n g s p re ad s h e e t s t o d o w n l o ad Fre e b o n u s # 1: T e c h n i c al A n al y si s E b o o k (49.95Value) Learn the basics of charting for covered call writing. Fre e Bo n u s # 2 : I n si de r T ran sac t i o n s Sp e c i al Re p o rt (49.95Value) Learn the “hidden mysteries” of insider transactions, and why you care. On e FRE E M ONT H o f C al l Wri t e r se rv i c e Two month for the price of one – time to really kick the tires! Ou r Pri c e G u aran t e e : We will never raise the price of CallWriter so long as you remain a member!

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A l l t h e Re al T i m e C o v e re d C al l L i st sT M Ou r Nak e d Pu t an d Su p e rPu t L i st s Un l i m i t e d u s e o f o u r T r a d e M a n a g e m e n t C a l c u l a t o r T M A w e al t h o f fre e e du c at i o n al m at e ri al s Fre e i n v e s t i n g T e l e L ab c al l s an d p re s e n t at i o n s Fre e E x c e l t rad i n g s p re ad s h e e t s t o d o w n l o ad Ou r Pri c e G u aran t e e : We will never raise the price of CallWriter so long as you remain a member!

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Legal Stuff Disc l aimer: This Special Report is published by LogiCapital Corporation (“LogiCapital”), which operates the famed CallWriter (www.CallWriter.com) website and publishes the Money Newsletter. Neither the author, LogiCapital, CallWriter nor any person associated with them is a broker or investment adviser, nor is any of them a professional securities analyst; and none of them recommends the purchase, sale or holding of any security. Your use of any information or strategy appearing in this book, in the MONEY newsLETTER or on CallWriter is solely at your own risk. We urge you to do all requisite analysis and properly plan each trade prior to placing any trade and to manage each open trade effectively. More about John Brasher… Trading stocks and stock options involves risks, and no strategy can eliminate them entirely. Moreover, poor trading decisions, frequently the result of greed or panic, are responsible for many losses in covered call writing, and only you can prevent them. Neither the author, LogiCapital, CallWriter nor any person associated with them will be liable to any person for any losses or damages, whatsoever, monetary or otherwise, alleged to arise from the content of CallWriter, this Special Report or the use of any strategy or information discussed on CallWriter. This book includes illustrations or content from other websites, notably the Chicago Board Options Exchange. Our usage of such content is not meant to imply and should not be taken as an endorsement or recommendation by them of CallWriter or this report.

Copyright and Ot her Not ic es: Copyright John Brasher 2007. All Rights Reserved. Trade Management Calculator™, Real Time Lists™ and Profit Engine™ all are trademarks of LogiCapital Corporation, owner and operator of CallWriter.com. Excel® is a registered trademark of Microsoft Corporation.

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