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: ELN is another stock that has done quite well for a number of writers over the past couple of years. This position began in May, and has one of those 'increase the trading volume' strike prices. The market makers have come up with some interesting way to increase activity, and offering a $19 strike price is one of them. Now the question is . . . do we let it be called, or try to save it.

THE SOLUTION: The solution is to use the Buy Back & Roll Out & Up strategy of Systematic Covered Writing.  Most of the time, for any given stock, a writer will be better off allowing a stock to be assigned as long as there will be sufficient cash to enter a new position. In this case, and probably due to only raising the strike price by $1, the writer was able to satisfy overall cash generation requirements AND keep the stock.

  • 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
25-May-07 Initial Stock Purchase Buy 100 ELN @ 19.6199 ($1,968.99)     $2,420.00
  Current Price $24.20 Elan Depository Receipt        
25-May-07 Initial Call Option Sell Jan $19 call @ 3.60  Rolled 12/07/07 $351.74    
7-Dec-07 Buy Back & Roll Out & Up Buy Jan $19 call @ 5.70   ($578.25)    
7-Dec-07  Appreciated Trade  Sell Jul $20 call @ 7.50   $741.73    
               
  Cash in Hand 25.93%       $515.22  TS

The new strike price is now above the purchase price, so there is no 'give back' if assigned. The duration will be fourteen months, but more than 25.93% will be generated, in fact, the bulk of it already has been added to the account. There is no set rule here . . . one simply justifies the transaction through the math.

Notice that as of this moment, the writer has been paid almost the same as the appreciation of the underlying stock!

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN ELN 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: 12/08/07