Systematic Covered Writing

... more than just covered calls!

"Systematic Covered Writing is a series of strategies for long-term investors (covered writers) that believe nobody really consistently knows which stock is going to appreciate at any particular point in time. They also believe there are a limited number of possible overall changes in any individual stock's value during a specified period of time and that someday the value of a stock will be higher than when it was originally purchased. Lastly, they understand that their wealth is not emotionally connected to any individual stock held within the portfolio."

Additional information is always available in the frequently asked questions section and the Glossary on the SysCW website.  Here are the links to  FAQS  and the SysCW Glossary.  Please note: the information presented below is for educational purposes only!  This is an example of one of the strategies contained within the Systematic Covered Writing system.  Be advised of the TERMS OF USE, located at the bottom of this page.

          FRX    Forest Laboratories Inc.

Potential TRADE  DATE :   August 6, 2006

THE STOCK:    Forest Laboratories INC. - (FRX) engages in the development, manufacture, and sale of branded and generic forms of ethical drug products, as well as nonprescription pharmaceutical products

THE STRATEGY:  Close a TDS Position   

ACCOUNT TYPE:  Taxable

THE THEORY:  Part of managing positions under the SysCW process is to try and minimize tax obligations by creating 'paper' losses.  This is one of the key benefits to the SysCW style of covered call writing.  Keep in mind . . . even if a stock loses value, when an option expires the premium received when it was sold becomes a taxable event.  The TDS Strategy is used to offset these gains, which provides some 'good' out of a stock that lost value.

THE COMMENTARY:  The TDS position was established in June against FRX.  Here is a look at the Position Tracker for both positions:

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Open Position  
        Stock Cash Total Cash  Value as of 
Date Strategy Status Position Investment Generated Generated 4-Aug-06
10-Jan-03 Initial Stock Purchase Buy 100 FRX @ 53.67 ($5,466.42) TDS Pending   $4,642.00
  Current Price $46.42 Forest Laboratories, Inc.        
10-Jan-03 Initial Call Option Sell Aug $52.50 call @ 6.80 Expired 8/16/03 $627.42    
18-Aug-03 Interim Trade Sell Oct $45 call @ 2.30 Rolled 10/06/03 $183.63    
6-Oct-03 Buy Back & Roll Out &Up Buy Oct $45 call @ 3.80   ($413.85)    
6-Oct-03 Interim Trade Sell May $50 call @ 4.5 Rolled 5/03/04 $416.12    
3-May-04 Buy Back & Roll Out &Up Buy May $50 call @ 16   ($1,612.49)    
3-May-04 Appreciated Trade Sell '06 Jan $55 LEAP @ 18.10 Expired 1/21/06 $1,797.47    
3-Feb-06 Appreciated Trade Sell '07 Jan $55 LEAP @ 3   $291.24    
               
  Cash to Date 23.59%       $1,289.54  
25-Jun-06 Initial Stock Purchase Buy 100 FRX @ 37.7856 ($3,786.56)     $4,642.00
TDS Current Price $46.42 Forest Laboratories, Inc.        
25-Jun-06 Initial Call Option Sell Aug $30 call @ 9.70   $961.22    
25-Jun-06 TDS Potential ($1,535.19)          
  Cash in Hand 25.39%       $961.22  

As you can see, FRX has appreciated over $10 since the June purchase.  The original stock has an option with a January 2007 expiration.  The TDS position will be closed at market open on Monday August 7th. There are a number of reasons why:

♦   The first reason is because that is part of the strategy . . .  close the TDS so that the funds can be used for other positions.

♦   The sooner the TDS is closed, the sooner a Dollar Cost Averaging or other stock purchase strategy can be used with the same stock.  Remember . . . a writer needs to wait a minimum of thirty days before purchasing the same stock in order to satisfy the 'wash sale rule'.

♦   The market has been bizarre lately.  Who knows what could happen over the next two weeks.

As is always the case . . . the writer does the math . . . and if appropriate . . . enters the transactions.  Based on the closing prices of August 4, 2006, here is a hypothetical look at the potential result of closing the FRX TDS position.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Closed Position  
        Stock Cash Total Cash  Annualized 
Date Strategy Status Position Investment Generated Generated Return
25-Jun-06 Initial Stock Purchase Buy 100 FRX @ 37.7856 ($3,786.56)      
TDS     Forest Laboratories, Inc.        
25-Jun-06 Initial Call Option Sell Aug $30 call @ 9.70   $961.22    
25-Jun-06 TDS Potential ($1,535.19)          
7-Aug-06 Hypothetical Buy Aug $30 call @ 16.70   ($1,678.75)    
7-Aug-06 Hypothetical Sell 100 FRX @ 46.39 $4,631.00 $844.44    
7-Aug-06     Net Cash Gain     $126.91 Annualized
43 Days  

Net Percentage Gained

     3.35% 28.45%

From this exercise . . . sure looks like this position should be closed on Monday.   The TDS position will end with a nice gain and a loss will be created.  The funds that become available can be used to establish new TDS positions. 

Two days later . . . the fruit of the labor!  The TDS position was closed as the data below indicates. The loss is 'created' by matching this sale with the January 10, 2003 purchase.  The lot must be specified in order to avoid having the cost basis assigned to the older shares.  The investor establishes a LIFO (Last In First Out) lot identification with the broker.

      SysCW   Position Tracker        
               
               
Historical Data Closed Position  
        Stock Cash Total Cash  Annualized 
Date Strategy Status Position Investment Generated Generated Return
25-Jun-06 Initial Stock Purchase Buy 100 FRX @ 37.7856 ($3,786.56)      
TDS     Forest Laboratories, Inc.        
25-Jun-06 Initial Call Option Sell Aug $30 call @ 9.70   $961.22    
25-Jun-06 TDS Potential ($1,535.19) Accounting        
7-Aug-06 Buy Call to Close TDS Option Buy Aug $30 call @ 16   ($1,608.75)    
7-Aug-06 Sell Stock to Close TDS Position Sell 100 FRX @ 45.85 $4,576.85 $790.29 Email 8/07  
7-Aug-06 TDS Created ($1,537.10) Net Cash Gain     $142.76 Annualized
43 Days   Net Percentage Gain     3.77% 32.00%

Note that any strategy involving tax issues should be discussed with a qualified professional.

Questions?     rlcoveru@wavecable.com

Systematic Covered Writing . . . . more than just covered calls!

Example Index

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN FRX 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 suggesting 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 provide 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