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: December 7, 2007

THE SITUATION: CELG is one of those quality companies that this writer would like to keep in the portfolio, BUT the price of the stock is currently above the Jan $55 strike price. FYI . . . on October 11, 2007, CELG traded as high as $75.44 a share. The recent pullback presents an opportunity for the writer to 'save' this position.

THE SOLUTION: The solution is to use the Buy Back & Roll Out & Up strategy of Systematic Covered Writing.  In this case the strategy is not used to prevent a loss, but rather to participate in the potential capital appreciation of the underlying stock, while preventing the current option from being exercised.

  • 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 7-Dec-07
21-Feb-07 Initial Stock Purchase Buy 100 CELG @ 53.878 ($5,394.80)     $5,797.00
 Current Price $57.97 Celgene Corp        
21-Feb-07 Initial Call Option Sell '08 Jan $55 LEAP @ 8.50   $841.72    
7-Dec-07 Buy Back & Roll Out &Up Buy Jan $55 call @ 5.30   ($538.25)    
7-Dec-07 Continued Trade Sell '09 Jan $60 LEAP @ 11.40   $1,131.73 Email 12/07  
               
Cash in Hand 26.51%       $1,435.20  TS

As you can see, the writer has 26.51% of the net investment back in hand.  Oh . . . and this is since February! With the RollOut&Up, the strike price is now over $6 higher than the purchase price, which means if CELG recovers from its recent decline, this position would easily break 37% on a back-to-cash profit basis.  Little less than two years . . .  little over 15% per year . . . satisfies the SysCW guidelines.

LEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN CELG 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: 12/07/07