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Covered-Calls 101

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A Conservative Approach to Covered-Calls

A number of readers have made positive comments about the recent educational narratives on position management. Since this process also allows us to highlight individual selections, we are going to continue using new portfolio candidates to illustrate common exit and adjustment methods for covered-calls.

This week's example is Premiere Global Services (NYSE:PGI). The company's stock has recently turned bullish in the wake of a positive earnings report. Revenues in 2007 increased 12.7% to $559.7 million, compared to $496.5 million in 2006 and diluted EPS totaled $0.52, compared to $0.37 in 2006. Going forward, the company appears poised for higher valuations as revenue growth in 2008 is expected to be greater than 10%. In addition, the technical outlook for the stock suggests downside support (for any near-term consolidation) is likely to emerge somewhere between $13 and $14.

The position listed in the long-term portfolio is:

Buy PGI Stock: Last Price = $15.19
Sell MAY-15.00 Call (PGI-EC): Bid Price = $1.30
Cost Basis = $15.19 - $1.30 = $13.89
Downside Protection = 8.6%
Maximum Profit = 8.0% (without margin)

The target entry price in this example trade will be:

Net Debit = $13.75
Downside Protection = 9.4%
Maximum Profit = 9.1% (without margin)

We'll monitor this position in the coming week to determine if an entry is possible. A stop-loss transaction (or position adjustment) should be triggered if PGI's share price falls below $13.25 - $13.75, depending on each individual investor's risk versus reward tolerance.

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