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Covered-Calls 101

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Portolio Activity

Our new position in Calgon Carbon (NYSE:CCC) is definitely exhibiting some of the potential volatility we spoke of in Sunday's narrative and today's rebound (in conjunction with the slightly bullish equity markets) suggests it will not be the most boring stock in the portfolio.

Recall the cost basis in the position is near $16.25, which appears to have been available during Monday's retreat, and the maximum available profit is achieved with the stock above $17.50.

The position as published:

Buy CCC Stock: Last Price = $18.45
Sell APR-17.50 Call (CCC-DW): Bid Price = $2.00
Cost Basis = $18.45 - $2.00 = $16.45
Downside Protection = 10.8%
Maximum Profit = 6.4% (without margin)

The target entry price was:

Net Debit = $16.25
Downside Protection = 11.9%
Maximum Profit = 7.6% (without margin)

Now we move to the most difficult part of trading: position management. For those who are relatively new to covered-calls and/or option trading in general, there is an excellent article on this subject here:

Position Management with Covered-Calls

Initially, traders should plan to exit the covered-call position if the stock moves below a level of support defined by the recent top formation (DEC-07 to JAN-08) and the 25-50 DMA; something near $16.00-$16.50, depending on your individual risk/reward criteria.

We'll talk more about specific exit methods in an upcoming narrative.

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