BUY BACK & ROLL OUT & UP

With the Buy Back & Roll Out strategy, you learned how you can prevent an option from being exercised without losing money by simply buying back the existing call option and then immediately selling a replacement. The RULES were straight forward in that you keep the strike price the same and the amount you receive for the new call option must be greater than the amount paid for the option that was closed by purchasing it. This next strategy in the Systematic Covered Writing philosophy takes this idea one step further.

The purpose of the BB&RO strategy was two fold. One, you want to prevent the stock from being sold, and two, you want to increase the amount of cash in the portfolio. Both of these 'goals' are important in that the amount of cash generated needs to be reasonable. With the introduction of the Buy Back and Roll Out and Up (BB&RO&UP) strategy we add another piece of the puzzle to the SysCW system or philosophy. The difference in the purpose of this strategy is that you want to increase the strike price, while still adding cash to the portfolio. Once again, the RULES.

In the BB&RO case, both RULES were equally important. In the case of the BB&RO&UP strategy, the primary purpose is to increase the strike price! Yes, you would also like to add a little cash, but raising the strike price is more important. There are two scenarios when you would use this strategy.

Recall in the Recover after Expiration strategy section, that there were times that the Initial Position strike price was lowered. The new position was given a descriptive name of an Interim Trade. Note that you do not want an option exercised when the strike price is lower than the initial Position strike price. If you lower it, there must be a way to increase it again! The Buy Back & Roll Out & Up strategy is one of the strategies of SysCW that allows you to do just that. Is it easy to do? Yes. And yes, it is based on a 'math exercise'!

When a stock appreciates from it's purchase price, there may be times when you want to 'follow the stock's' upward movement by increasing the strike price of the option. There are many times when you can do this, and there will be times when you can not. It's all in the math. If you can add cash to the account AND increase the strike price AND it makes sense to do so, then go ahead. You will see in the examples exactly how this is accomplished. There are times when you could increase the strike price, but the amount you could take in with the replacement option would be less than the cost to close the existing option. SysCW principles suggests that you do not 'give back' premium (cash) you have already generated to chase a stock's increasing value.

The new concept is to concentrate on the cash generation process and not the value of individual stocks. The reason why SysCW suggests that this is appropriate is the realization that nobody knows. Stocks go up . . . and then stocks go down. Unless the math works, there is no reason to 'chase' them. Of course, as with any set of rules or guidelines, there will be exceptions. For example, in some portfolios, there may be positions that the investor wants to consider 'core' holdings. Sector allocation is very important and the Buy Back & Roll Out & Up strategy can be used to follow the price movement of a core stock position.

Repeating a common theme, Systematic Covered Writing provides you with a basket of strategies that are both simple to use and repeatable. These strategies show you what to do after you enter the initial covered position. Below is the Strategy Chart with this newest strategy added.

Start	If the Stock	Use this SysCW Strategy
		All Accounts	Taxable Accounts

Just to repeat, with this strategy you are going to Buy Back the existing option and then sell a new option at a higher strike price. Though you want the amount received to be greater than the amount paid, the main purpose of the strategy is to increase the strike price. A great deal of the 'thought process' will be covered in the following examples.