Systematic Covered Writing

 . . . more than just covered calls . . .

Portfolio Evaluation

October Expiration Friday is behind us for 2006 and it's time to pick out a portfolio and give it the 'once over' yearly review.  One of the philosophies the writer adheres to is the idea that in order for an investment style to be truly viable, in needs to function in a variety of market conditions. Let's face it, so far 2006 has been a very good year for equities.  If the investment strategy being used has not worked during the 'good times', good luck when things aren't so rosy.  Please keep this thought in mind as we look at a set of examples forthcoming dealing with a portfolio that was established in August of 2002.

THE Portfolio: Established on August 22, 2002 with an initial (and current) funding of $48, 467.61.  This portfolio is an IRA, so there are no tax issues to discuss at this time.  The account is currently not being funded, other than the initial deposit.

THE DATE: October 21, 2006

THE STOCK: DNDN - was a $10 stock when first purchased in December of 2004. Of the analyst flowering this biotech company for the past 90 days, two have rated the stock a strong BUY and one a strong SELL, with the others in between. This brings up the idea that for every investor that thinks 'this', there is another that things 'that' . . . oh . . . and they both believe they are right!

THE STRATEGY: The ability to Dollar Cost Average a position is how a covered writer addresses the 'this or that' issue mentioned above.  It is often expressed as  . . . nobody knows! When current educational examples are sent to subscribers illustrating a new Dollar Cost Average transaction . . . please note that the 'idea' of the strategy has been used for years by the covered writer.  It's not just a hair brained idea for today, but one that has been used in the past and will be used in the future.

THE COMMENTARY:  In this case there are two separate positions.  The latest addition was added in March of this year by purchasing 100 additional shares and selling two of the Jan $7.50 LEAPS (which are now calls).  If you look carefully, you can see that there was a period of time where 100 shares were uncovered, which is why the writer could sell two contracts after purchasing just 100 shares in March.

      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 20-Oct-06
1-Dec-04 Initial Stock Purchase Buy 100 DNDN @ 10.08 ($1,015.00)     $501.00
  Current Price $5.01 Dendreon Corporation        
1-Dec-04 Initial Call Option Sell May $10 call @ 2.10 Expired 5/21/05 $201.49    
1-Dec-04              
23-May-05 Continued Trade  Sell Jan $10 LEAP @ .60 Expired 1/21/06 $51.74    
1-Aug-05 Initial Stock Purchase Buy 200 DNDN @ 6.0599 ($1,218.98)     $1,002.00
1-Aug-05 Initial Call Option Sell two Jan $7.50 @ .70 Expired 1/27/06 $130.49    
Combined $2,233.98 300 @ $7.45 Combined 200 Share Position        
27-Jan-06 Appreciated Trade Sell two '07 Jan $7.50 LEAPS  @ .70   $130.49    
23-Mar-06 Dollar Cost Averaging Buy 100 DNDN @ 4.32 ($439.00)     $501.00
Combined $2,672.98 400 @ $6.68 Combined 200 Share Position        
23-Mar-06 Appreciated Trade Sell two '07 Jan $7.50 LEAPS @ .45   $80.49    
  Cash in Hand 22.25%       $594.70  

Consider the current position.  The stock is trading at $5 a share.  The net cost basis of all 400 shares is $6.68 and the current strike price is $7.50 for this coming January.  Now . . . not saying this 'can' happen, but rather that it 'could' happen. . . . . What if the stock is trading above $7.50 in January and the shares are called?  The writer will receive eighty-two cents a share additional cash generation and the position will be back to cash.  The result?  The total return for this two year and one month position would be over 33%.  Would that be 'okay?

Keep in mind that this stock closed at $3.75 a share on May 16, 2006.  If one watches value because they are a short term investor, yes, they probably would have disposed of this position.  The SysCW point of view is that 'it ain't over, 'til it's over'.  Until it's over, the writer just wants to be paid for being in the market. 

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

The Covered Writer

_____Update 2007_____

      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 24-Jan-07
1-Dec-04 Initial Stock Purchase Buy 100 DNDN @ 10.08 ($1,015.00)     $427.00
  Current Price $4.27 Dendreon Corporation        
1-Dec-04 Initial Call Option Sell May $10 call @ 2.10 Expired 5/21/05 $201.49    
1-Dec-04              
23-May-05 Continued Trade  Sell Jan $10 LEAP @ .60 Expired 1/21/06 $51.74    
1-Aug-05 Initial Stock Purchase Buy 200 DNDN @ 6.0599 ($1,218.98)     $854.00
1-Aug-05 Initial Call Option Sell two Jan $7.50 @ .70 Expired 1/27/06 $130.49    
Combined $2,233.98 300 @ $7.45 Combined 200 Share Position        
27-Jan-06 Appreciated Trade Sell two '07 Jan $7.50 LEAPS  @ .70 Expired 1/20/07 $130.49    
23-Mar-06 Dollar Cost Averaging Buy 100 DNDN @ 4.32 ($439.00)     $427.00
Combined $2,672.98 400 @ $6.68 Combined 200 Share Position        
23-Mar-06 Appreciated Trade Sell two '07 Jan $7.50 LEAPS @ .45 Expired 1/20/07 $80.49    
24-Jan-07 New Appreciated Trade Sell four May $7.50 calls @ .60   $227.99    
               
  Cash in Hand 30.78%       $822.69  

Rather than write about the use of the SysCW Dollar Cost averaging strategy, the focus will be on the latest transaction.  Again . . the bullets:

Should the holder of this position be worried about the 'value' of the stock?  Sure . . . it will be nice when the value is $6.68, but . . . in spite of the 'value', if the investment (which is a fixed amount) can generate up to 25% additional cash if today's activity can be repeated? Please note that this 25% is hypothetical . . . we won't know until we get there, but it also has noting to do with the 30.78% the position has already generated. 

The writer will tell you straight away that this is very exciting! Losers that are winners.  Got to love the concept.

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

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN DNDN 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: 02/05/07