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."

Note: The ONXX holding was rolled on September 7, 2007 ... See Below for

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

Keep in mind that the initial information has to deal with a number of positions that were rolled to create cash.  The 2007 example begins after this historical presentation.  This should be a great way for you to 'see' how the process works over extended periods of time....

THE DATE:  November 4, 2005

THE DILEMMA: There will be times when 'Stuff' happens, for example, what if a covered writer wanted to:

  1. Raise additional cash, let's say about $4,000.00

  2. Increase the size of the account's realized capital loss for the 2005 tax year.

  3. Maintain the ownership of each underlying stock position.

  4. Increase the strike price for a number of holdings in the account.  A bullish move!

  5. Prevent stock from being sold for a significant period of time.

  6. Accomplish 1 through 5 with the following positions:

Date Strategy Position Investment Generate Total Value 11/04/05
30-Nov-04 Initial Stock Purchase Buy 100 ADBE @ 60.65 ($6,090.00) TDS Used   $6,540.00
Current Price $32.70 Adobe Systems Incorporated        
18-Jul-05 Continued Trade Sell two Jan $30 calls @ 2.15   $405.00    
            $1,021.25  
7-May-03 Initial Stock Purchase Buy 100 BBBY @ 40.15 ($4,040.00)     $4,171.00
SysCW 14 Current Price $41.71 Bed Bath & Beyond Inc.        
24-May-05 Continued Trade Sell Nov $40 call @ 2.55   $230.00    
            $1,014.42  
12-Jul-05 Initial Stock Purchase Buy 100 CELG @ 42.40 ($4,265.00) TDS Used   $5,985.00
Reverse Current Price $59.85 Celgene Corporation        
12-Jul-05 Initial Call Option Sell Jan $40 call @ $7.10   $685.00    
            $685.00  
23-Dec-03 Initial Stock Purchase Buy 100 CEPH @ 47.23 ($4,730.00)     $4,602.00
Current Price $46.02 Cephalon, Inc.        
31-Aug-05 Continued Trade Sell Jan $45 call @ 1.15   $90.00    
            $928.21  
18-Jun-03 Initial Stock Purchase Buy 100 CREE @ 19.12 ($1,937.00)     $2,479.00
Current Price $24.79 Cree, Inc.        
3-Dec-04 Dollar Cost Averaging Buy 100 CREE @ 38.989 ($3,923.90)     $2,479.00
Combine $5,860.90 200 @ $29.30 Combined Position        
17-Jun-05 Interim Trade Sell two Jan $25 calls @ 5.40   $1,055.00    
            $2,130.13  
15-Dec-03 Initial Stock Purchase Buy 100 CY @ 20.51 ($2,076.00)     $1,540.00
Current Price $15.40 Cypress Semiconductor Corporation        
7-Jan-04 Dollar Cost Averaging Buy 100 CY @ 22.27 ($2,252.00) TDS Used   $1,540.00
7-May-04 Dollar Cost Averaging Buy 100 CY @ 15.22 ($1,547.00)     $1,540.00
Combine 5,875.00 300 @ $19.56 Combined 300 Share Position        
30-May-05 Interim Trade Sell three Jan $15 calls @ .95   $260.00    
            $775.71  
16-Nov-04 Initial Stock Purchase Buy 200 ERES @ 13.58 ($2,741.00)     $2,798.00
Current Price $13.99 eResearch Technology, Inc        
17-Jun-05 Continued Trade Sell two Jan $12.50 calls @ 2.25   $425.00    
            $980.50  
7-May-03 Initial Stock Purchase Buy 100 ICOS @ $39.32 ($3,957.00) TDS USED   $2,921.90
Current Price $29.22 ICOS Corporation        
14-Jan-04 Initial Stock Purchase Buy 100 ICOS @ 38.82 ($3,907.00) TDS USED   $2,921.90
Combine $7,864.00 200 @ $39.63 Combined  200 Share Position        
19-Jul-04 Interim Trade Sell two Jan $25 calls @ 2.20   $415.00    
            $2,028.08  
17-Jun-05 Initial Stock Purchase Buy 100 IMCL @ 33.86 ($3,393.00)     $2,982.00
Current Price $29.82 ImClone Systems Incorporated        
17-Jun-05 Initial Call Option Sell Jan $30 call @ 7.60   $760.00    
            $760.00  
17-Jun-05 Initial  Stock Purchase Buy 200 ONXX @ 26.4799 ($5,320.98) TDS Used   $5,866.00
Current Price $29.33 Onyx Pharmaceuticals, Inc.        
17-Jun-05 Initial Call Option Sell two Nov $25 calls @ 4.50   $875.00    
            $875.00  
16-Jan-04 Initial Stock Purchase Buy 100 RHAT @ 20.53 ($2,078.00)     $2,458.00
Current Price $24.58 Red Hat, Inc.        
6-Dec-04 Continued Trade Sell '06 Jan $20 LEAP @ 2.80   $255.00    
            $255.00  
12-Jul-05 Initial Stock Purchase Buy 100 TOL @ 54.30 ($5,455.00)     $3,811.00
Current Price $38.11 Toll Brothers, Inc.        
12-Jul-05 Initial Call Option Sell Jan $55 call @ 6.10   $585.00    
            $585.00  
             
             
    Net Cost Basis of Stock Positions ($57,712.88)      
    Net Total Cash Generated to Date       $12,038.30    
      Current Value of Stock Holdings $54,634.80

This section of the portfolio was separated from the remaining positions for clarity.  The net investment is listed, as is the date each position was established.  The current option is also listed with it's premium.  What's missing are any transactions that took place prior to the current call.  That, again, is just for clarity.  How each position arrived at it's current cash generation total is not significant for this discussion.  If the position is an 'Initial Position' then the date of the stock purchase and the option sale are the same as are the option premium and the total amount.

For each position listed there are four amounts provided.  The net investment, the cash generated with the active call option, the net total amount of cash generated and the current value of the stock.  At the bottom of this partial Historical Data table can be found the totals as indicated in the table.

THE SOLUTION: The solution is to use the Buy Back & Roll Out, or the Roll Out & Up strategies of Systematic Covered Writing.  Some quick rules for these strategies are:

  • 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 strike price must be the same or higher than the previous strike price.  The 'same strike' for the Roll Out strategy and a 'higher strike' for the Roll Out & Up strategy.

Using these strategies over and over for the twelve position listed above accomplished all of the desired results.  This, of course, is no surprise to the covered writer.  It is simply repeating the same process that has been used since SysCW was conceived by the covered writer.  Below is the updated Historical Data for these positions as of November 4, 2005.

Date Strategy Position Investment Generate Total Value 11/04/05
30-Nov-04 Initial Stock Purchase Buy 100 ADBE @ 60.65 ($6,090.00) TDS Used   $6,540.00
Current Price $32.70 Adobe Systems Incorporated        
18-Jul-05 Continued Trade Sell two Jan $30 calls @ 2.15 Rolled 11/04/05 $405.00    
4-Nov-05 Buy Back & Roll Out & Up Buy two Jan $30 calls @ 3.70   ($765.00)    
4-Nov-05 Appreciated Trade Sell two '08 Jan $35 LEAPS @ 6.30 $1,235.00    
            $1,491.25 24.49%
7-May-03 Initial Stock Purchase Buy 100 BBBY @ 40.15 ($4,040.00)     $4,171.00
SysCW 14 Current Price $41.71 Bed Bath & Beyond Inc.        
24-May-05 Continued Trade Sell Nov $40 call @ 2.55 Rolled 11/04/05 $230.00    
4-Nov-05 Buy Back & Roll Out  Buy Nov $40 call @ 2.30   ($255.00)    
4-Nov-05 Continued Trade Sell '08 Jan $40 LEAP @ 9.90   $965.00    
            $1,724.42 42.68%
12-Jul-05 Initial Stock Purchase Buy 100 CELG @ 42.40 ($4,265.00) TDS Used   $5,985.00
Reverse Current Price $59.85 Celgene Corporation        
12-Jul-05 Initial Call Option Sell Jan $40 call @ $7.10 Rolled 11/04/05 $685.00    
4-Nov-05 Buy Back & Roll Out & Up Buy Jan $40 call @ $40 call @ 20.30 ($2,055.00)    
4-Nov-05 Appreciated Trade Sell '08 Jan $45 LEAP @ 24.60   $2,435.00    
            $1,065.00 24.97%
23-Dec-03 Initial Stock Purchase Buy 100 CEPH @ 47.23 ($4,730.00)     $4,602.00
Current Price $46.02 Cephalon, Inc.        
31-Aug-05 Continued Trade Sell Jan $45 call @ 1.15 Rolled 11/04/05 $90.00    
4-Nov-05 Buy Back & Roll Out & Up Buy Jan $45 call @ 3.30   ($355.00)    
4-Nov-05 Appreciated Trade Sell '08 Jan $50 LEAP @ 7.80   $755.00    
            $1,328.21 28.08%
18-Jun-03 Initial Stock Purchase Buy 100 CREE @ 19.12 ($1,937.00)     $2,479.00
Current Price $24.79 Cree, Inc.        
3-Dec-04 Dollar Cost Averaging Buy 100 CREE @ 38.989 ($3,923.90)     $2,479.00
Combine $5,860.90 200 @ $29.30 Combined Position        
17-Jun-05 Interim Trade Sell two Jan $25 calls @ 5.40 Rolled 11/04/05 $1,055.00    
4-Nov-05 Buy Back & Roll Out &Up Buy two Jan $25 calls @ 1.80   ($385.00)    
4-Nov-05 Appreciated Trade Sell two Jan $30 LEAPS @ 5.10 $995.00    
            $2,740.13 46.75%
15-Dec-03 Initial Stock Purchase Buy 100 CY @ 20.51 ($2,076.00)     $1,540.00
Current Price $15.40 Cypress Semiconductor Corporation        
7-Jan-04 Dollar Cost Averaging Buy 100 CY @ 22.27 ($2,252.00) TDS Used   $1,540.00
7-May-04 Dollar Cost Averaging Buy 100 CY @ 15.22 ($1,547.00)     $1,540.00
Combine 5,875.00 300 @ $19.56 Combined 300 Share Position        
30-May-05 Interim Trade Sell three Jan $15 calls @ .95 Rolled 11/04/05 $260.00    
4-Nov-05 Buy Back Roll Out & Up Buy three Jan $15 calls @ 1.95   ($610.00)    
4-Nov-05 Interim Trade Sell three '08 Jan $17.50 LEAPS @ 3.50 $1,025.00    
            $1,190.71 20.27%
16-Nov-04 Initial Stock Purchase Buy 200 ERES @ 13.58 ($2,741.00)     $2,798.00
Current Price $13.99 eResearch Technology, Inc        
17-Jun-05 Continued Trade Sell two Jan $12.50 calls @ 2.25 Rolled 11/04/05 $425.00    
4-Nov-05 Buy Back & Roll Out  Buy two Jan $12.50 calls @ 2.25   ($475.00)    
4-Nov-05 Appreciated Trade Sell two '08 Jan $15 LEAPS @ 3.80 $675.00    
            $1,180.50 43.07%
7-May-03 Initial Stock Purchase Buy 100 ICOS @ $39.32 ($3,957.00) TDS USED   $2,921.90
Current Price $29.22 ICOS Corporation        
14-Jan-04 Initial Stock Purchase Buy 100 ICOS @ 38.82 ($3,907.00) TDS USED   $2,921.90
Combine $7,864.00 200 @ $39.63 Combined  200 Share Position        
19-Jul-04 Interim Trade Sell two Jan $25 calls @ 2.20 Rolled 11/04/05 $415.00    
6-Dec-04 Buy Back & Roll Out &Up Buy two Jan $25 calls @ 3.20   ($665.00)    
6-Dec-04 Interim Trade Sell two '06 Jan $30 LEAPS @ 4   $775.00    
            $2,138.08 27.19%
17-Jun-05 Initial Stock Purchase Buy 100 IMCL @ 33.86 ($3,393.00)     $2,982.00
Current Price $29.82 ImClone Systems Incorporated        
17-Jun-05 Initial Call Option Sell Jan $30 call @ 7.60 Rolled 11/04/05 $760.00    
4-Nov-05 Buy Back & Roll Out  Buy Jan $30 call @ 2.75   ($300.00)    
4-Nov-05 Continued Trade Sell Jan '08  $30 LEAP @ 8.20 $795.00    
            $1,255.00 36.99%
17-Jun-05 Initial  Stock Purchase Buy 200 ONXX @ 26.4799 ($5,320.98) TDS Used   $5,866.00
Current Price $29.33 Onyx Pharmaceuticals, Inc.        
17-Jun-05 Initial Call Option Sell two Nov $25 calls @ 4.50 Rolled 11/04/05 $875.00    
4-Nov-05 Buy Back & Roll Out Buy two Nov $25 calls @ 4.60   ($945.00)    
4-Nov-05 Appreciated Trade Sell two '08 Jan $30 LEAPS @ 5.60 $1,095.00    
            $1,025.00 19.26%
16-Jan-04 Initial Stock Purchase Buy 100 RHAT @ 20.53 ($2,078.00)     $2,458.00
Current Price $24.58 Red Hat, Inc.        
6-Dec-04 Continued Trade Sell '06 Jan $20 LEAP @ 2.80 Rolled 11/04/05 $255.00    
4-Nov-05 Buy Back & Roll Out Buy Jan $20 call @ 5.20   ($545.00)    
4-Nov-05 Continued Trade Sell '08 Jan $20 LEAP @ 8.60   $835.00    
            $545.00 26.23%
12-Jul-05 Initial Stock Purchase Buy 100 TOL @ 54.30 ($5,455.00)     $3,811.00
Current Price $38.11 Toll Brothers, Inc.        
12-Jul-05 Initial Call Option Sell Jan $55 call @ 6.10   $585.00    
4-Nov-05 Buy Back & Lower Buy Jan $55 call @ .15   ($40.00)    
4-Nov-05 Interim Trade Sell Jan $45 call @ 1   $75.00    
            $620.00 11.37%
             
             
    Net Cost Basis of Stock Positions ($57,712.88)      
    Net Total Cash Generated to Date       $16,303.30    
      Current Value of Stock Holdings $54,638.31

For this example, the covered writer will end with a few things to look at:

  1. Notice that the total net investment (cost basis of the stock) is the same.  Once the purchase is made, the cost does not change.

  2. Notice also that the current value of the stock is still the same.  When the market opens on Monday, this 'value' amount will continue to fluctuate with the market.

  3. Now . .  . notice the total cash generated now is $16,303.30. At the beginning of the day, this figure was $12,038.30.  The covered writer increased the cash position by $4,265.00 TODAY.

  • Until the follow up example arrives, note the difference between the current value for individual stock as of today (11/04/05) and the investment in that stock.  Then look at the total amount of new cash that has been generated because calls have been written against the stock holding.

  • Make note of the current strike price relative to the cost basis.

  • Understand that the positions are REAL.

There are many that would look at all this data and express that this was a LOT OF WORK. To them, the covered writer contends that $4,250 is a lot of money.  Once a covered writer enters the data a few times, it's really nor different than balancing a check book. Somewhere it is written: No Pain . . . No Gain!   This was not painful, and the reader can decide if it was gainful.

Additional information is always available in the frequently asked questions section and the Glossary on the SysCW website.  Here are the links to  FAQS  and the SysCW Glossary.

SEPTEMBER 10, 2007

ONXX - BUY BACK & ROLL OUT & UP

Today, the decision was made to roll the Jan $30 calls to '09 Jan $35 LEAPS.  The purpose for this activity was two fold.  First, to increase the cash position in the Portfolio, and second, to protected the 200 shares of ONXX from being assigned at $30 a share.  Here in the entire history as maintained by the SysCW 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 10-Sep-07
17-Jun-05 Initial  Stock Purchase Buy 200 ONXX @ 26.4799 ($5,302.98) TDS Used   $8,350.24
  Current Price $41.75 Onyx Pharmaceuticals Inc        
17-Jun-05 Initial Call Option Sell two Nov $25 calls @ 4.50 Rolled 11/04/05 $890.46    
4-Nov-05 Buy Back & Roll Out & Up Buy two Nov $25 calls @ 4.60   ($929.50)    
4-Nov-05 Appreciated Trade Sell two '08 Jan $30 LEAPS @ 5.60 Rolled 9/10/07 $1,710.42    
10-Sep-07 Buy Back & Roll Out & Up Buy two Jan $30 calls @ 13.70   ($2,749.50)    
10-Sep-07 Appreciated Trade Sell two '09 Jan $35 LEAPS @ 18.30   $3,650.44    
               
  Cash in Hand 48.51%       $2,572.32  

As you can see, the BB&RO&Up strategy has been used twice in a row in order to maintain this holding. Note that the new strike price is now over $9 above the purchase price and that as of today, the writer has been paid a total of $2,572.32 for owning this stock.

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN ANY 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 © 2005. All rights reserved.
Revised: 09/10/07