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Some of you, but not all, participated in this test market...here are the results. We had a profit on 9 of the 10 covered call contracts. If you had 100 shares of all 10 stocks we would have created $3,330 of cash (1000 shares x $3.30 = $3,330). If we had 1000 shares of all 10 stocks we would have created $33,300 (10,000 shares x $3.30 = $33,300). The average cost of these shares was $36.30 for a direct return of 9%. We had the covered calls on average for about 3 months, so you calculate the annualized return.

Covered Call & Downside Risk
Our plan is to buy high quality stocks, low in their value cycle to lower our downside risk. We could hold them for several years selling them near the peak of their value cycle. On the ride up we plan to use covered calls when we believe that there is short term downside risk (in the stock or market). The plan worked again. The average share price of the 10 companies (at the close on 7/19/02) was $30.60. We paid $36.30, so we have an average paper loss in the account of $5.70 per share. The $3.30 cash creating gain has covered about half of that paper loss. It was good that we recognized that there was downside risk, and we acted to take advantage of the situation. We can now use the new cash to buy more shares at today's lower prices.

What Do We Do Now?
At the end of this practice period we still own the all the common shares. When the shares prices go up again and our models say the shares are temporarily over valued, we will (SOccP) sell cover calls again. Now you have learned about an investment tool that creates for you when the market prices are moving down.

What Did We Learn?
Hopefully you have a much better idea of how you can create new cash managing downside risks in a weak market. Most people think...buy low and sell high. We have demonstrated how you can sell high, and buy it back lower. Perfection is never possible in the market, but if we can make some money in different market situations, we will likely be investing for a long time. It is all about your win/loss percentage and how much money you can generate using your good investing tools. So learn the tools, think it through, take the challenge, take the bad hits, have some fun, make some money, and when you get old, talk about the big ones that got away!

Could This Work For You?
Of course! So, why don't more people use this hedging technique? Here's how I would explain it. First, many people have never heard of this risk management hedging technique. Second, many stock brokers are not skillful at using covered calls and therefore do not teach it. Third, covered calls are part of a tool box of investment techniques called "option trading". These words, option trading, have developed a bad connotation amongst many investors because most of the tools in the tool box are very risky. For an example: one of these tools is to "buy a call." The historical record is that about 75% of the call buyers lose money. Sometimes they lose all the money they committed. This approach is speculation....and we do not recommend it. By the way, this is the guy we are selling our covered calls to, he is the other side of your covered call contract. We sell to reduce downside risk, he buys taking on the enormous risk.

How Can We Help?
First, we use the Eagle Investor, that uses a non-emotional buying approach to select stocks. We try to buy them low in their value cycle. If we do this well then we are helping to reduce the overall investing risk. Our experience says we can do this most of the time, but not all of the time. (That's why using Stop Orders is a good tactic in your investing approach.) In this long term stock share buying approach we are expecting to hold the stock shares for at least 24 to 48 months. Simply stated, we are trying to buy the shares when they are undervalued and sell them when they are overvalued. But, wouldn't it be great, to create some new cash over this 24 to 48 month period. This is where selling covered calls becomes a useful investment tool.