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Katrina Raising Energy Stock!

Customary drop in volume before holiday.
Katrina relief on its way. A review of the

covered call strategy. Waiting to see what
tomorrow’s news brings. Get the latest at
TradingTrainer.com.

Hey trading team,

This is A.J. on Monday, September 5th with your
Trading Trainer web log. We are your home of
market insights for the serious option trader.
This web log will cover the events in the market
from this past Friday as well as prepare you for
watching the market tomorrow.

Volume dropped significantly on Friday as is
customary before a three day holiday. Energy
prices cooled somewhat on Friday when crude from
the International Energy Agency and the U.S.
strategic reserves was introduced to help buffer
the drop in supply. Also, the Federal Government
will be injecting 10.5 billion dollars into the
economy in the form of Hurricane Katrina debacle
relief over the next couple weeks. Just remember
these one time subsidies often sacrifice short
term relief with long term pain. High energy
prices and the costs to clean up after the
Hurricane Katrina debacle are really powering
speculation that the Fed will hold off on further
rate hikes at least for one session before the end
of 2005. For the week our broad market index
bell-weathers all closed up ending some down
trends with volume weighted key reversal ups.
This upcoming week will be an interesting one. On
Thursday we’ll get the first real tally since
Hurricane Katrina came through, of the energy
supplies. I’m expecting reaction to the real
numbers. In the meantime, I’ve been taking the
long weekend to catch up on some office
organization. Team, nothing makes for an easier
go of trading, than when your office is clean and
organized.

Let’s review really quick the covered call writing
strategy. The strategy is, you buy the underlying
stock shares in lots of 100 and then you sell
option contracts on it for the premiums.
Typically, you want to buy the stock when it was
low and then sell the premium when it is high.
The beauty of the covered call strategy is that as
soon as you sell the option, you have locked in
your gains. Because of this fact, covered call
writing is something that I do in my retirement
plans where option trading is not conservative
enough.

See, team every morning I look through our covered
call watch list and look at the near term option
premiums minus the current price of the stock plus
the strike price of the option. I take that as a
ratio to the current price and that will tell you
your current return on invested capital. If I see
any in our watch list that are over 5% I get
excited. And, with Grace (ticker: GRA) having
a channel breakout early last week,.. I got
excited specifically aboout Grace.

Grace’s Chaikin Oscillator pulled back on
Wednesday which is when I bought a few hundred
shares of the stock. I paid 10.55 a share. Then,
on Friday I sold the September 10 Call at 1.85 per
call. Now let’s due the math. We have two
scenarios when the September 10 Call expires. The
first scenario is that the option is in the money
and I get called out. In that scenario, I buy the
stock at 10.55, I sell the call at 1.85, and I get
called out of the stock at 10.00. That means my
return on invested capital is 1.85 (I received for
selling the option) plus the $10 (I received when
I got called out) minus the $10.55 I paid for the
stock all over the $10.55 I paid for the stock.
So if I’m called out, I make 12% ROI in under
three weeks. Not bad for a retirement fund
investment. Now, the alternative is that the
option is out of the money and I don’t get called
out. That means I made $1.85 per stock share and
I get to sell another call again next month as
soon as this month’s expires. In fact, it is not
uncommon to write three or four subsequent months
of covered calls before finally getting called
out. It’s a beautiful thing. I’ll keep you
posted on my Grace covered calls as the third
Friday of September rolls around.

Looking at my current portfolio… My EOG
resources October 60 calls closed lower at
$6.80 an option. My current return on my
invested capital is 10%. I’ve been in that trade
for 42 days. My Pacificare Health Systems November
75 calls closed higher at $3.50 an option. My
current return on my invested capital is 21% after
being in the trade for 42 days. My Quicksilver
September 40 Puts closed higher at $0.50 an
option. I’m in the red with a return on my
invested capital of -69% after being in the trade
for 16 days. And my Tenaris October 105 Calls
closed lower at $14.30 an option. I’m in the
black with a return on my invested capital of 81%
after 7 days in the trade.

This is my plan for tomorrow. I’ll be setting my
stop loss alerts for EOG resources at 5% return on
invested capital and for Pacificare Health
Systems, I’ll set it 10% return on invested
capital. With respect to Tenaris I’m back to a
set stop loss strategy at 65% return on invested
capital. I’m also watching the price with respect
to the 7 day moving average. Tomorrow will be
more of a watch and see day as we see how the news
that has been streaming over the weekend effects
investors on their day back.

Okay, team. I’m done.

Till tomorrow, happy market watching, trading
and money making. Trading Trainer is here
helping you create your dream lifestyle.

Best regards always,
A.J.

Click on the below play button to hear
the blog as an audio from A.J. himself!


About the Author
A.J. Brown is a full time options trader, author,
speaker and consultant. Watch him review stock
charts on video each day, listen to his audio
newsletter where he leads you by the hand
through the end-to-end process of successful
options traders and get tips and tested strategies
proven to boost your return on your invested
capital by massive amounts in his membership
site at TradingTrainer.com today.

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