SNDK - 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.

Almost a year ago the covered writer established a long-term position with SNDK. There are many ways of investing to choose from. Some choose to enter short term positions with the goal of obtaining high returns when annualized. In the covered writer’s opinion, this ties the investor to the market and requires being ‘right’ more often than not. Just an opinion . . . we all have them.

SysCW, on the other hand, suggests taking a long-term approach . . . not the buy and hold philosophy of the ‘good old days’, but rather a ‘buy and be paid because you’ did philosophy. Such is the case with this SNDK position. SanDisk, in my opinion, is the lead dog in the flash storage business. If you like to read . . . consider the attached academic report on this company that I wrote recently.

The stock is up nicely today and if possible, the writer would like to maintain ownership of this stock. Keep in mind that in January of 2006, this stock was trading at over $74 a share. Could be due to increase sales during the Christmas season, or it could be because their physical year ends and the data was good to say the least.

The writer could just let this stock be called in January and keep the bulk of the $1200 that was received when the stock was purchased. Or . . . the writer could say . . . I like this stock and because the price is down close to the strike price, I think I’ll go ahead and roll the position, and increase the strike price while I do so for $55 a share to $60. Keep in mind the discussion that follows is based on the math that was known prior to executing the transactions.

Results: By rolling the position, the writer added $461.45 to the net amount generated to date. This means that the writer has over 30% of the net cash needed to purchase this stock, and this amount has been generated is slightly under one year. Yes, the position is covered until January 2008 . . . but the writer has the money NOW . . . not then. Also note that because the strike price is now above the cost basis, additional revenue will be generated if the existing option is exercised . . . or shall I say, if the writer allows it to be exercised. So, for this position, a great deal of the potential back to cash gain is already in the writer’s hands, with the rest of it built into the relationship between the strike price and the purchase price of the stock.

Should every position be rolled like this? No! . . . Covered writers generate the highest return with NEW positions, not by rolling old ones, but . . . this factor needs to be weighed against the desire to maintain a balanced portfolio. SNDK, for this portfolio, is part of that balance. Note that sometime during 2007 . . . if the writer needs funds and SNDK is still appreciating . . . this position could be closed. Just because the stock has a 2008 LEAP written against it does not mean that the position can not be closed prior to expiration.

Systematic Covered Writing
… more than just covered calls!


Buy Back & Roll Out & Up: Math Exercise

Date of Transaction	Monday, October 09, 2006

Stock Symbol	SNDK		Current Price	$58.25

Number of Shares	100

Net Investment	$5,524.90	Existing January Strike Price		$55.00

Net Cash Generated (1)	$1,241.69	New Strike Price		$60.00

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 $55 calls			$869.25

Step 2: The Roll Out	Net cash received from the sale of '08 Jan $60 LEAP			$1,330.70

Step 3: The Cash Generated	Net result of the Buy Back & Roll Out & Up			$461.45	(A)

Total Cash Generated to Date			$1,703.14

Net Percentage of the Investment Generated (2)			30.83%

Net Back to cash Gain if this New Option is Exercised			$2,161.24	(B)

Net Back to Cash Percentage Gain if Exercised (3)			39.12%

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				$500.00
will be added to the amount received if the current option is exercised. By choosing 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 SNDK 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.