AGIX
AtheroGenics, Inc.
THE TRADE DATE : Feb. 17, 2006 to Nov. 14, 2006
THE STOCK: AtheroGenics, Inc. AGIX engages in the discovery, development, and commercialization of
therapeutics for the treatment of chronic inflammatory diseases.
THE STRATEGY: Buy Back & Roll Out & Up
This is the strategy that allows low strike prices to be established. Whether the strike is the result of an
Interim Trade, or simply a lower than usual Initial Call Option, there needs to be a way to increase the strike when needed. If an
Interim Trade strike price could not be increased, there may be a significant loss created if the option is exercised. With an
Initial Call Option, if the strike is not increased, then a great deal of the premium may be 'given back' if the option is exercised.
This strategy is one way to prevent option contracts from being exercised. It works because as long as there is
extrinsic value with an existing option, the odds of it being exercised early are significantly in a covered writers favor.
RULES
Each strategy within Systematic
Covered Writing has its own set of rules. For the BB&RO&Up
strategy, there are only two.
-
The strike price of the Roll Out option needs to
be higher than the strike price of the option that was closed with
the Buy Back transaction.
-
The premium paid to close the existing option must be
less than the premium received for selling the roll out option.
THE THEORY: The reason the Buy Back &
Roll Out & Up strategy works is because the longer the duration (time) an option
is going to exist, the higher its value or premium. A $30 January 2006 option
may have a higher value than a $25 May 2005
option. Options are priced based on a number of factors. Two of
these factors are (1) the relationship between the strike price and the stock price
and (2), how long the option will exist. Some call positions are established in the SysCW process with the understanding that the
covered writer can often choose to prevent an option from being exercised at
a specified strike price by
using the Buy Back & Roll Out & Up strategy.
THE COMMENTARY: If the Buy Back & Roll Out
strategy is the heart of Systematic Covered Writing,
and it is, then the Buy Back & Roll Out & Up strategy is the soul!
This strategy is a very important part of the SysCW process. At times, it will allow a covered writer to partake in the capital appreciation of the
underlying stock. The idea of writing calls against a stock, and
maintaining ownership of that stock over long periods of time is one that is
rarely explored. Yet, it can be accomplished, more often than not!
It all depends on the math. Why? Because one of the rules is the
amount of money generated by the 'Roll Out' option must be greater than the
amount used to close the 'Buy Back' option.
With this example, the Initial Call Option was established at $10 when
the stock was trading at $15.93. This was possible due to the excess extrinsic value in the call premium In words, someone
was willing to pay the covered writer $9.80 a share for the right to purchase this stock for $10 a share . . . right after the writer
had purchased it for $15.93. In effect, the writer was going to receive a total of $19.80 for a stock that cost $15.93.
When November 2006 arrived, the writer decided to prevent the '07 Jan $10 call from being exercised. That call
was purchased to close the option, and immediately replaced with a '08 Jan $12.50 LEAP option. The strike price was increased and
the cash received for the Roll Out was more than the cash used for the Buy Back, thus satisfying the rules for this strategy.
As one looks at various examples and strategies, note that with this position, the writer has the use of $1,196.71
regardless of the current trading price of the underlying stock. There is still some 'give back' built into this position, but it is
possible the Buy Back & Roll Out & Up strategy could be used again to increase the strike price from $12.50 up to $15. For now . .
. it's just wait and see.
In the writer's way of thinking, any position that can generate over seventy percent of
the net investment in less than a year is a great position!
_______________January
17, 2006 Update___________________
Given the uncertainty of phase 3 passage of the AGIX drug for treatment of cancer, and the
limited pipeline, the writer made the decision to close this position. There are two reasons for this decision. One, is
the acknowledgement that this position should never have been established in the first place, and two, the realization that it is
better to be safe than sorry. The position should not have been established because there already was exposure to this stock
in this portfolio. This second position was added because the premiums were 'too good to be true'.
The findings for the trial are now delayed towards the end of the first quarter. These
results could go either way . . . the writer is no longer willing to take the chance with this extra holding. The closed position is
listed below:
The position ends with a small gain . . . the loss is in have the funds tied up in this position for
almost a year. Investing involves learning . . . this writer has learned from this experience. Needless to say, even though
AGIX is on the Current List, the covered writer is not establishing new holdings with this stock at this time.
PLEASE NOTE THAT THIS EXAMPLE IS
NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN AGIX 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:
02/05/07