JCOM
J2-Global Communications
THE TRADE DATE : Feb 15,
2005 to April 2007
THE STOCK: j2 Global Communications, Inc. (JCOM) provides outsourced, value-added messaging and communications
services to individuals and businesses worldwide.
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 merely trying to prevent a stock from being assigned while
increasing the potential capital gain if it is assigned in the future.
THE THEORY: There will be positions that a writer may choose to maintain past the initial call
option. The main reason for this would be to keep the assets allocated into particular sectors. Sometimes this can be
accomplished by just rolling the strike price from one expiration to another. At other times, it may be desirable to increase the
strike price, which is the goal of the Buy Back & Roll Out &Up strategy.
THE COMMENTARY: We begin with a look at the transaction history for this position as maintained in
the SysCW Position Tracker.
For a little over a year, the writer maintained this position by rolling the initial $35 option from September of 2005 to March of
2006. At that time the writer elected to use the Buy Back & Roll Out & Up strategy in order to keep (or at least try to keep) up with
this appreciating stock.
Note that in May of 2006 the stock completed a two-for-one split, which means the writer is now
holding 200 shares with a net cost basis of $18.95. The '08 Jan $40 LEAP became two $20 LEAPS when the stock split. As of
April 15, 2007, JCOM is trading at $28.68 per share. This means that the stock will be assigned . . . IF the writer elects to
allow that to happen. The point is ... even though someone has the right to purchase these shares for $20 a share, the writer had
the prerogative of removing said right be rolling the option at some point.
Needless to say, the decision to do, or not to do that
will be based on the desire to maintain this holding.
CONCLUSION - It is possible with the
strategies of Systematic Covered Writing to maintain positions over extended periods of time. The
fundamental reason for doing so would be sector allocation. Mathematically, a covered writer is always going to generate more cash by
establishing new positions than by rolling old ones. BUT . . . there are other factors to consider than generating the maximum
amount of cash. Sector allocation is one such reason.
PLEASE NOTE THAT THIS EXAMPLE IS
NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN JCOM 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