THE TRADE  DATE :    May 8, 2006

THE STOCKS:  AtheroGenics, Inc.  AGIX engages in the discovery, development, and commercialization of therapeutics for the treatment of chronic inflammatory diseases.

THE STRATEGY:  Close a TDS position.

THE THEORY:  Today's example is yet another illustration of creating a paper loss using the Systematic Covered Writing Tax Deferral strategies. When a stock loses value, the covered writer takes advantage of the opportunity to create a paper loss by establishing a temporary position using the depressed stock.

THE COMMENTARY: 

In tax accounting, the call positions and the stock position are separate equity positions each with their own identifying symbol. The IRS allows investors to choose the cost basis for positions that are liquidated.  There are only two rules as far as the IRS is concerned:

1. If a loss is created through the liquidation by using a lower cost basis, then all positions of the same security must be held in the account for at least thirty days.

2. If a loss is created, the same security cannot be repurchased for a minimum of thirty days after the sale.

Together - these are known as the 'wash sale rule'.

Now SysCW has it's own set of rules for TDS (Tax Deferral Strategy) positions.

1. The TDS position must end with a back to cash gain.

2. The position should be closed as soon after the thirty day holding period is established.

3. The 'potential' paper loss should justify the position.  The covered writer generally looks for a minimum of $500 in potential loss' with the idea of being on the lookout for opportunities to create losses throughout the entire year.

How does a covered writer find 'opportunities'?  By simply looking at the data in the Position Tracker, all one needs to do is to look for a Current Value that is at least $500 less than the net investment. For today's example, we will be looking at a portfolio which contains shares of AGIX stock.  The date was March 24, 2006.  At that time, the Position Tracker showed the following relationship between the 'cost' and 'value' of 200 shares of AGIX.

As you can see, the position that began on December 30, 2005 with an investment of $4,016.98 had a value of only $3,180.00 on March 24, 2006.  This is exactly what the covered writer looks for!  On March 24th, the covered writer established a short term position using AGIX stock. In the Position Tracker, this TDS position is listed below the December purchase and a few notations were made to remind the covered writer what is going on. 

Note the TDS Pending notation in the Cash Generated column for the first position and the various 'TDS' notations in the second position.  Now lets fast forward to a current view as of May 5, 2005.

Note that the price of AGIX is now at $14.78 (as of May 5^th).  The TDS position does not expire for two more weeks, but the position has been in place for over thirty days.  If the current prices hold, the covered writer will close this position on Monday May ^8th. The stock is at $14.78 and the Ask price for the May $15 call is $0.45.  This position is at Interactive Brokers, which means it will cost $1.50 to close the option and $1.00 to sell the stock.  Because the prices are known, and the commissions are known, the writer can 'hypothetically' close the position. Here would be the results:

Boy, that's close . . . $4.82 from being profitable.  According to the 'rules' the covered writer would not close this position.  On the other hand . . . is it worth $4.82 to 'hang in there'?  That question will be decided on Monday . . .

The purpose of this example is to illustrate a typical thought process that the covered writer would go through. Are there times when a small 'real' loss is acceptable?  Yes.  There are only twelve months in a year, and losses need to be created. 

This is a highly recommended SysCW strategy.  PLEASE . . . feel free to ask questions . . . . rlcoveru@wavecable.com.

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PEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN AGIX STOCK OR ANY OTHER EQUITY.  THE INFORMATION IS PROVIDED FOR EDUCATIONAL PURPOSES ONLY.  THERE IS NO GUARANTEE THAT SIMILAR TRANSACTIONS CAN BE EXECUTED IN THE FUTURE. INVESTING IN THE STOCK MARKET INVOLVES RISKS, DO SO ONLY WITH A KNOWLEDGE AND UNDERSTANDING OF THE RISKS INVOLVED!

The information provided above is for informational purposes only, and no mention of a particular security constitutes a recommendation to buy, sell, or hold that or any other security, or that any particular security, portfolio of securities, transaction, investment strategy is suitable for any specific person. You further understand that the Covered Writer will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. To the extent any of the information available on this website may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person. Always remember that past results are not necessarily indicative of future performance.

These are the terms of use.  Why are they here?  Because the examples provided are real.  The transactions actually took place.  The dates are real, the positions are real.  Some transactions will have been executed on the day you receive the email.  What you are agreeing to, is the fact that in no way is it being suggested that you can, or should, enter a similar position.  Why?  Because that would be providing investment advice and the Covered Writer is not authorized to do that.  There is also no guarantee that similar transactions could be executed at any time in the future. Only licensed brokers are allowed to provide investment advice.  Therefore, you are agreeing that the preceding example was provided for 'educational purposes' for the sole purpose of illustrating the Systematic Covered Writing strategies.

Thank you!

SYSTEMATIC COVERED WRITING
Copyright © 2006. All rights reserved.
Revised: 02/05/07