"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."
Before we start . . . please consider the following perspective . . .
If markets and / or investments lent themselves to rational analysis in any significantly predictive way, somebody (or, more properly, somebody's computer) would have perfected that analysis long since, and would have taken away all the chips of everybody else at the table. This has not happened. And if it hasn't happened by now--with every computer nerd in the world washing through his computer every recorded trade since the Assyrians swapped wheat to the Babylonians for bronze--it ain't gonna happen. The secret [to investing] is: there is no secret. (Murray, 1996,p.38)
Reference:
Murray, N. (1996). The Excellent Investment Advisor. New York: Nick Murray
SNDK SanDisk Corporation
THE TRADE DATE : March 30, 2006
THE STOCK: SanDisk Corporation (SNDK) designs, makes and markets flash memory storage products used in a wide variety of electronic systems.
THE STORY: The current story on SNDK is as follows:
LEAP contracts are available.
Earnings up year over year for ten of the last twelve quarters.
Part of the S&P MidCap 400 Index.
The analysts rate the stock as a HOLD.
THE STRATEGY: When a call expires, the premiums you received when you sold it become a realized capital gain for the calendar year. When a call is exercised, the premiums received when the stock was sold become a realized capital gain along with the gain or loss realized via the underlying stock liquidation. When a call option is closed (which means you bought it back), the net result of the sell and the buy become a realized capital gain or loss depending on the relationship between what you paid to close the option and what you received when it was sold.
If you do not understand what was just read . . . please read it again!
If you trade in a taxable account, you really need to understand the advantages of the Systematic Covered Writing system. This example is designed to make the process crystal clear. If it is not clear when you are finished. . . then you owe it to yourself to ask the covered writer for more information.
THE COMMENTARY: The specific SysCW strategy that we want to cover today is the TDS position. TDS stands for Tax Deferral Strategy. It is important for the following reason: SysCW will generate realized capital gains even if underlying stock positions lose value. If you have capital gains . . . the IRS requires that you pay income tax on this unearned income at your regular tax rate. The goal of the TDS position is to minimize your reportable gains, without losing any money. It is hoped that this idea would appeal to you?
Having said that . . . let's begin with a real
active position that was established this year using SNDK stock. The SysCW Math Exercise, along with some additional comments should
be reviewed by clicking
.
PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN SNDK 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