Systematic Covered Writing

 . . . more than just covered calls . . .

Buy Back & Roll Out & Up

RMBS  Rambus Inc.

February 6, 2007

The SysCW BB&RO&Up transactions were emailed to subscribers on the day the transactions were executed.  In order to know what to do in the future, it is important to understand what we did in the past. I write those words often because I believe they are well founded. Recovering occurs each time an option expires, even when a stock loses value.  This is a key philosophy of the Systematic Covered Writing process.  Writers will profit from stocks that appreciate, and they will also generate additional cash with the stocks that lose value.  These lower than acceptable strike prices can be established because the writer understands that there is a 'plan' if the strike is too low.  That plan normally will involve the implementation of the Buy Back & Roll Out & Up strategy.

The guidelines  to this strategy are as follows:

1. The existing option is closed, which prevents the stock from being assigned.

2. A new option is sold at a higher strike price than the previous option.

3. The amount of cash received for the Roll Out & Up needs to be greater than the amount of cash used for the Buy Back.

A position is not over until it's over, and the writer is still working on this one.

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THE POSITION: Throughout the year, subscribers will see many SysCW examples involving higher volatility stocks. One of the reasons this happens is because there is generally more activity surrounding a tech stock than a company like Home Depot Inc. or Costco.  For the entire month of December, RMBS traded below $20 a share. When the Jan $25 call expired, the writer decided to sell a one month $20 call . . . expecting it to just expire.  So much for what is 'expected'!

THE STRATEGY: This week good news about RMBS became available and the stock gapped up $3.85 on February 5th. Great!  Now the stock is above the Interim strike price. The idea behind the BB&RO for this position was to move the strike back up to the original $25 position.  The Feb $20 calls were closed and replaced with two Aug $25 calls. Note that the result of the two part transaction was the addition of $80.97 to the position.

COMMENTS: Recently, comments have been written using the 'looking at trees instead of the forest' analogy in discussions about individual positions, versus an entire portfolio. The same thing can be said about isolated transactions. Some will look at this position and see the activity on February 5, 2007.  They will come away with a view that only $80.97 was generated.  They are correct, but they are looking at a tree!

The covered writer on the other hand looks at this position and sees that the investment has now generated a total of $2,728.91, or 48.55% of the net investment.  The writer is looking at the forest!

CONCLUSION:  The short-term Recover After Expiration option was rather short lived!  One must know what they will do if a stock moves above the established strike price.  The process is rather simple, and the covered writer has been using this thought process since 2001.  My guess would be that this strategy will actually see more use given that the short-term calls are written closer to the actual trading price.  Some will expire and a new call will be written.  Others will breach the strike and the Systematic Covered Writing Buy Back & Roll Out & Up strategy will 'save' the position.

Though we profess that nobody knows what will happen . . . we established new and continued covered positions with the understanding that we know what we will do when whatever happens . . . happens.

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN RMBS 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: 02/07/07