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: ELN - was added to the portfolio in January of 2006 and provides a great illustration of how one would want every covered position to perform. Over the past 90-days, the analysts have had no fewer than 3 and as many as 4 strong SELL ratings on this stock.  With that prognosis in mind, it's a good thing we are not dependent on appreciation to make money!

THE STRATEGY: The latest strategy used with this stock was the Buy Back & Roll Out. The purpose of the strategy is to prevent an option from being exercised.  This is taking the pro-active approach to covered positions.  One basically does not 'have' to let a stock be called, he or she can do something if desired.

THE COMMENTARY:  The stock was purchased for $14.35 and a $15 call was written against it.  The call was 'rolled' in June to the current Jan $15 call.  After the rolling transactions, the position had generated over 36% of the cost basis of the stock during the first six months of it's existence in the portfolio. The stock is currently trading at $15.88 or above the strike price.  No problem . . .

Here is one of the positions that is working perfectly.  As covered writers, we learn to take the good with the bad, and this position is all good as the historical data confirms.

      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
27-Jan-06 Initial Stock Purchase Buy 100 ELN @ 14.35 ($1,442.00)     $1,588.00
  Current Price $15.88 Elan Corporation, plc (ADR)        
27-Jan-06 Initial Call Option Sell Jul $15 call @ 3.50 Rolled 6/23/06 $341.73    
23-Jun-06 Buy Back & Roll Out  Buy Jul $15 call @ 2.25   ($233.25)    
23-Jun-06 Continued Trade  Sell Jan $15 call @ 4.30   $421.73 Email 6/23  
  Cash in  Hand 36.77%       $530.21  

This is a position where the covered writer would definitely consider adding additional shares. Note that the adding of shares is not just reserved for positions that have lost value.  Adding shares to this position will probably make sense given that the '08 Jan $15 LEAP is currently trading at $4.80 per share.  Think about it . . . you buy a stock for $15.88 and some one pays you $4.80 for the right to buy the stock for $15 a share.  So . . . as you're thinking about that . . . ask yourself . . . what in the world are 'they' thinking.

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 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: 12/10/06