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."

RMBS - The TDS Position

THE TRADE  DATE :    September 5, 2006

THE STOCK: Rambus Inc. (RMBS)  - This company creates a range of chip interface technologies that improve the time-to-market, performance, and cost-effectiveness of customers' semiconductor and system products.

THE STRATEGY:  Follow up on the TDS position that was established in August.

THE THEORY:  Part of the process of investing using the Systematic Covered Writing thought process is to take advantage of stocks that lose value so as to reduce a given year's tax liability without 'losing' money. If the stocks in a portfolio have lost value, then it is entirely possible that the overall account value could be down at the the end of any given year.  The problem is, the call options that expire during the year, create realized capital gains, which means in a taxable account there may be capital gains tax.

Covered writers basically trade to avoid the tax consequences . . . regardless of the value of the account. The Rambus position and TDS position are a perfect example of how this works.

THE COMMENTARY: The only real comments for this example are those that deal with timing.  Take a look at the Position Tracker data for both the original position and the TDS 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 1-Sep-06
9-Jan-06 Initial Stock Purchase Buy 200 RMBS @ 26.45 ($5,297.00) TDS on 100 Pending $3,176.00
Current Price $15.88 Rambus Inc.        
9-Jan-06 Initial Call Option Sell two '07 Jan $25 LEAPS @ 9.20   $1,830.44    
               
  Cash in Hand 34.56%       $1,830.44  
4-Aug-06 Initial TDS Stock Purchase Buy 100 RMBS @ 11.53 ($1,160.00)     $1,588.00
TDS Current Price $15.88 Rambus Inc.        
4-Aug-06 Initial TDS Call Option Sell Sep $10 call @ 2.30   $221.74 Email 8/04  
4-Aug-06 TDS Potential ($1,443.76)          
  Cash in Hand 19.12%       $221.74  

As you can see, the stock is tracking above the $10 strike price with only two weeks left until expiration.  The key thought is the fact that on Tuesday, September 5, 2006, the 30 day minimum holding period will be up.  The covered writer will check the math, and if the call can be closed and the stock sold with the TDS position ending in a gain, then that is exactly what will transpire on Tuesday.  The whole idea is to end the TDS as soon as possible.  This allows the covered writer the opportunity to either enter a second TDS against the remaining 100 shares of RMBS, or invest the funds in a new position.

The TDS should create a loss of around $1400 and you will receive a follow up message when the position is closed. 

SysCW . . . establish a systematic plan . . . work that plan . . . and then don't be surprised when the plan works!

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 RMBS 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