Systematic Covered Writing

... more than just covered calls!

"Systematic Covered Writing is a series of strategies for long-term investors 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."

This example of the Buy Back & Roll Out & Up strategy.

THE DATE: January 11, 2008

THE SITUATION: IMCL has been held in this portfolio since 2005, during which time the stock has seen its share of ups and downs. The current issue revolves around an Interim Trade strike price (Jan $35), which would be exercised on January 18, 2008 given the current trading price of the stock ($41.09).

THE SOLUTION: The solution is to use the Buy Back & Roll Out & Up strategy of Systematic Covered Writing.  In this case the strategy is being used to prevent $489 of the cash generated to date from being 'given back' due to a pending assignment. The rules are always the same for this strategy. Note the stock 'could be' sold for $35 a share and still have the position end with a gain!

  •     The amount of cash used for the Buy Back, must be less than the cash received for the Roll Out option.  Each use of the strategy must result in a net cash gain.

  •     The replacement strike price must be higher than the existing strike price. 

Check out the data for this position as maintained with the Position Tracker.

      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 13-Jan-08
16-Mar-05 Initial Stock Purchase Buy 100 IMCL @ 39.89 ($3,996.00)     $4,109.00
  Current Price $41.09 ImClone Systems Inc        
16-Mar-05 Initial Call Option Sell Aug $40 Call @ 5.40 Expired 8/19/05 $531.73    
16-Mar-05 Interim Trade Sell Feb $35 call @ 3.40 Rolled 2/16/06 $331.73    
16-Feb-06 Buy Back Roll Out & Up Buy Feb $35 call @ 1.90   ($198.25)    
16-Feb-06 Continued Trade Sell Aug $40 Call @ 3.10 Expired 8/21/06 $301.74    
24-Aug-06 Interim Trade Sell 08 Jan $35 LEAP @ 4.50 Rolled 1/11/08 $441.73    
11-Jan-08 Buy Back Roll Out & Up Buy Jan $35 call @ 6.10   ($618.25)    
11-Jan-08 Continued Trade Sell '09 Jan $40 call @ 8.30   $821.73    
               
  Cash in Hand 40.34%       $1,612.16  

Through the use of this strategy, the writer prevented the stock from being assigned at $35, increased the strike price to $40, and generated $203.48 in new cash in the process. The writer has learned to focus on the overall productivity of a given portfolio. and not necessarily the individual positions. 

The same thought process could be applied to the individual positions. In this case, the investment ($3,996.00) has generated $1,612.16, or 40.34% since March of 2005. Notice that based on the current 'value', the stock has appreciated by less than $120.00 over the 2005 cost basis.  Yet, through the strategies of SysCW, the writer has earned the $1,612.16. Does that make this a great position?  Absolutely not . . . it's just an 'okay' holding.

It is worth pointing out that this stock traded as low as $26.28 on December 27, 2006.  The writer, with the SysCW long-term philosophy, does not care what the stock traded for a little over a year ago.  What will be important to the writer will be what the stock is traded for when it is sold, which when be when the writer decides to liquidate the position at a profit. In the meantime, the writer just wants to be paid because the stock is held in the portfolio.

LEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN IMCL 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 © 2007. All rights reserved.
Revised: 01/13/08