THE TRADE DATE : May 8, 2006
THE STOCK: JPMorgan Chase is a leading global financial services firm with assets of $1.3 trillion and operations in more
than 50 countries.
THE STRATEGY: Investing in non-tech stocks.
THE THEORY: Part
of the process of investing using the Systematic Covered Writing thought process is to invest in a
diversified arena of equities. The tendency is to always be looking for the 'big hitters', but a wise investor will also have some lower
flying stocks, which tend to stabilize the value of a portfolio over time. Such is the case with JPM.
THE COMMENTARY:
The general plan with a stock like JPM is to try for three sources of potential profit at the same time.
During the holding period, dividend payments will be added to the account. Dividends are
one of the reasons why the covered writer prefers long stock positions as opposed to selling naked puts or buying LEAP
options and writing calls against the LEAP.
Of course, the covered writer is also going to generate cash via the sale of call options against
the stock holding.
As the stock appreciates, the covered writer will increase the strike price so that at some
point, the writer will partake in some of the capital appreciation of the underlying stock position.
Can this be done? Absolutely! Here is the entire trading history for a JPM position that has been held
since January 2003.
Can you imagine trying to figure out where a position was in terms of profitability without the SysCW Position
Tracker? The covered writer has the historical record for every position in every portfolio such that it can be referenced at any point
in time. Let's take a look at the price chart of this holding over the investment period.
THE HISTORY:
As 'luck' would have it, no sooner was the stock purchased and covered . . . it tanked! Slightly over a month after the June
$27.50 (2003) call was sold, the covered writer used the Buy Back & Wait strategy in hopes of catching an up-swing. After all . .
. this was supposed to be a 'safe' investment. You know . . . one of those 'less volatile' stocks! Once again . . . the nobody knows
theorem comes into play.
The covered writer closed the June call option and then waited until May to recover the
position. Just another twist to the strategies of Systematic Covered Writing, which in this
case . . . was a stellar idea! In May of 2003, the covered writer sold the '05 Jan $35 LEAP. Keep in mind, the purpose of
this position as listed above. The writer is looking for dividends, option premiums and capital appreciation. Call the
writer greedy . . . it's okay!
Notice all through 2004, the stock was trading above the $35 strike price. This
is typical, in that it is very unusual for an option to be exercised early. In December of 2004, the 'math' indicated that the
covered writer could close the $35 option and Roll Out & Up to the $40 strike price as long as the writer was willing to sell a call out
to 2007. As you can see, the writer was willing to 'give back' seven dollars to increase the strike price by $5. Trading $7 for
potentially receiving $500 more if the option was exercised seemed like a good trade off. The writer also factored in that dividends
would continue to accrue.
Now look at where the position is today. If this stock were to be called, which it
won't, the position would bring in over $12.50 per share in capital appreciation! For a 'safe' holding, this stock could end up paying
more than most tech stocks! If you care to do the math, you would find that the position would have generated over 70% in three and a
half years. (Assuming it was closed in May, 2005).
Works for me! PLEASE . . . feel free to ask questions . . . .
rlcoveru@wavecable.com.
PEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN
JPM 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
and the SysCW
.