Systematic Covered Writing

 . . . more than just covered calls . . .

Sticking With the Program

THE DATE: August 31, 2006

THE STOCK: Synaptics, Incorporated (SYNA)

THE STRATEGY: The Buy Back & Roll Out

THE COMMENTARY: This example is going to begin with a 'price picture' of this stock during the holding period, and a look at the Position Tracker data for this position.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Open Positions  
        Stock Cash Total Cash  Value as of 
Date Strategy Status Position Investment Generated Generated 31-Aug-06
3-Mar-05 Initial Stock Purchase Buy 200 SYNA @ 22.699 ($4,539.80)     $5,040.00
Current Price $25.20 Synaptics, Incorporated        
3-Mar-05 Initial Call Option Sell two Sep $22.50 calls @ 4 Expired 9/17/05 $790.47    
19-Sep-05 Continued Trade  Sell two Mar $22.50 calls @ 1.05 Rolled 3/09/06 $200.49    
9-Mar-06 Buy Back & Roll Out Buy two Mar $22.50 calls @ 2.95   ($599.50)    
9-Mar-06 Continued Trade  Sell two Sep $22.50 calls @ 5.30 Rolled 8/31/06 $1,050.46    
31-Aug-06 Buy Back & Roll Out Buy two Sep $22.50 calls @ 2.90   ($589.50)    
31-Aug-06 Continued Trade  Sell two Mar $22.50 calls @ 5   $990.46    
  Cash in Hand 40.59%       $1,842.88  

This price chart above represents the changes in SYNA from the time the stock was purchased until August 30, 2006.  Under the heading Nobody Knows . . . . we find the following:

♦ The strike price (horizontal red line) has remained at $22.50
♦ This stock, which was purchased at $22.70, fell to $15 during the holding period.
♦ The value of the stock as of August 31st was about $500 higher than the amount invested.
♦ During the same time period, the writer has generated over $1,800, or more than 40% of the amount invested.
♦ The current option takes the position to the end of the second year.
♦ The stock was featured in an example that was emailed on March 9, 2006.

A question that may be asked is why did the writer 'roll' this position now?  The answer is . . . . with a strike price of $22.50 and a stock trading price of $25.20, the option would have a minimum value of $2.70 ($25.20 - $22.50 = $2.70 = intrinsic value).  The writer could 'see' that a maximum of an extra $0.20 would be paid if the option was rolled on August 31st.  This value is a maximum because at expiration it would cost a least a nickel in extrinsic value to close this (or any other) option. No matter what the price, the market maker never lets one close a position for free.

So . . . it is more likely that the writer paid an extra $30 to close the position on August 31st (200 shares times $0.15 extrinsic value per share).  For an extra thirty bucks . . . it is worth it to protect the position in the writer's eyes.  What if the stock fell to below $20 over the next few weeks?  What if it increased dramatically?  The writer did the math . . . could 'see' that the amount of cash generated for an up to two year holding period (40.59%) was well within the guidelines of SysCW, and decided .... why wait?

How does a writer 'know when to roll them'?  He or she never will 'know' . . . . let the math be your guide, and then just make sure you remember why you did it.  Don't get in a habit of second guessing yourself.  Be satisfied with what you did do, rather than pondering what you could have done. The writer is simply sticking with the long-term program of Systematic Covered Writing.

Comments, questions and opinions are always welcome . . . rlcoveru@wavecable.com

The Covered Writer

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN SYNA 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! STRATEGIES INVOLVING TAX ISSUES SHOULD BE DISCUSSED WITH YOU TAX PROFESSIONAL.

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: 12/10/06