RMBS - Buy Back & Roll Out $ Up

This SysCW BB&RO&Up example was 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. 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 addition cash with the stocks that lose value. Then, at some point in time, the strike price is increased, which is the purpose of the Buy Back & Roll Out & Up strategy.

In August, when RMBS was trading at $10.70, a January $15 strike price seemed ‘reasonable’. Well, a month later, the stock is at $18.31 and ‘who knows’ where it will be in January? The key to an Interim Trade is not allowing the stock to appreciate too far above the 'Interim' strike price. How far is too far? All one needs to do is periodically check the math on either a Buy Back and Roll Out, or the Buy Back & Roll Out & Up strategies . . . just to make sure the math ‘works’.

RMBS was trading at $34.24 in January of this year . . . having followed this stock for a number of years, it could be that high this coming January, or it could be lower than it is today. A covered writer simply acknowledges the fact the he or she has no idea where it will be. The ‘nobody knows’ is not just a cute expression, but rather one of the significant principles of Systematic Covered Writing. It’s a mind set . . . it also happens to be true.

In doing the math for this RMBS position the writer could see that when completed, the position would have generated over 36% of the capital used to purchase the 200 shares of stock. This has been accomplished since January of this year and includes a Dollar Cost Averaging transaction that was completed and emailed to subscribers on August 11th. Even though the new option does not expire until January 2008 . . . the writer has the money NOW!

Then look at the duration . . . January of 2008 would be the end of the second year. Cash generation is satisfied with today’s activity and now the writer does not need to be concerned with the price of RMBS for quite some time. The premium money is in the ‘bank’.

Please always feel free to question the strategy and or thought process. We both learn by interacting.

Have a covered day!

Systematic Covered Writing
… more than just covered calls!


Buy Back & Roll Out & Up: Math Exercise

Date of Transaction	Wednesday, September 27, 2006

Stock Symbol	RMBS		Current Price	$18.18

Number of Shares	200

Net Investment	$4,508.00	Existing January Strike Price		$15.00

Net Cash Generated (1)	$1,458.95	New Strike Price		$20.00

Strategy: Use the Systematic Covered Writing BB&RO&Up strategy.

Purpose: Prevent an existing option from being exercised and generate cash
and attempt to partake in potential capital appreciation of the underlying stock.

Step 1: The Buy Back	Net cash used to close Jan $15 calls			$989.50

Step 2: The Roll Out	Net cash received from the sale of '08 Jan $20 LEAP			$1,170.46

Step 3: The Cash Generated	Net result of the Buy Back & Roll Out & Up			$180.96	(A)

Total Cash Generated to Date			$1,639.91

Net Percentage of the Investment Generated (2)			36.38%

Net Back to cash Gain if this New Option is Exercised			$1,114.91	(B)

Net Back to Cash Percentage Gain if Exercised (3)			24.73%

Comment: In order to enter transactions, two events should be considered. One is the
amount of new cash generated via the strategy and the other is knowing what the end
result would be if the new call is exercised. Those two amounts are listed above as
(A) and (B). Do the math first . . . then do the transactions if they are merited!




(1) This is the total net cash generated from all previous activity with this position.

(2) This percentage is not a profit percentage. It is simply the premiums generated
to date, divided by the net investment.

(3) Because the proceeds received if the option is exercised is an amount that can
be precisely calculated, the net back to cash amount can be calculated. Dividing
that amount by the net investment yields the net percentage gain. This is not an
annualized amount because the data does not indicate the duration of the position.

Conclusion: By increasing the strike price, a total of				$1,000.00
will be added to the amount received if the current option is exercised. By chosing to 'do
something' a covered writer may partake in the capital appreciation of the underlying stock.

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.