ERES
eResearch Technology, Inc
THE TRADE DATE : December 20,
2005 to April 2007
THE STOCK: eResearch Technology, Inc. (ERES) provides technology and services that enable the pharmaceutical,
biotechnology and medical device industries to collect, interpret and distribute cardiac safety and clinical data more efficiently.
THE STRATEGY: The Buy Back & Roll Out
& Up
It has been
stated that there are many strategies within the
Systematic Covered Writing
process and that they are 'intertwined'. This means that the strategies can be used in various combinations as the market value of
the underlying stock position fluctuates.
RULES
Each strategy within Systematic
Covered Writing has its own set of rules. For the Buy Back & Roll Out & Up strategy, there are only three.
-
The strike price of the option used to re-cover
the stock must be higher than the strike price of the option that is
closed.
-
The duration of the new option contract should be as short
as possible, while generating enough premium to justify the
transaction.
-
The new premium (cash generated) from the Roll
Out option must be greater than the amount needed to close the
existing option.
One further noteworthy point: Normally, a
covered writer will close an Interim Trade option transaction if the
underlying stock position rises above the 'Interim' strike price.
The holder of an Interim Trade position does not 'really want' to sell
the stock for the Interim Trade strike price. The fact that (in
the vast majority of covered positions) a covered writer can prevent an
option from being exercised, allows the Interim Trade to be established
in the first place. The ability to close an existing option is a
fundamental characteristic of Systematic
Covered Writing.
Having said that . . . with this example the writer is increasing the strike price of a position with an Interim
Trade status. The Interim Trade is used to generate cash while a stock's value is depressed. The ability to increase the
strike price over time allows the writer to generate this additional cash.
THE THEORY: As long as there is extrinsic value in an option, the odds of the option being
exercised early are extremely low. This observation allows the establishment of Interim options without the fear of the stock
being assigned. Note: the strike price for an Interim Call option should always be above the trading price of the stock at
the time the call is sold.
THE COMMENTARY: We begin with a look at the transaction history for this position as maintained in
the SysCW Position Tracker.
With this example, we are looking at a stock that has lost significant value. This will happen! When the Initial Call Option
expired, the writer elected to use a Mar $7.50 option by establishing an Interim Trade. On expiration Friday, the writer used the
BB&RO&UP strategy to prevent the stock from being sold for $7.50 a share. In doing so the writer increased the strike price from
$7.50 to $10 while adding $40.99 to the position at the same time.
If the stock remains below $10, the writer will consider Dollar Cost Averaging this position.
CONCLUSION - Some holdings will produce stellar returns, others will not. From the writer's
perspective, this investment has generated 20.19% since December 2005. The value is the value . . . and it is the one aspect of
writing calls that the investor cannot control.
PLEASE NOTE THAT THIS EXAMPLE IS
NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN ERES 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 suggested 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 provided 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:
04/15/07