Systematic Covered Writing

 . . . more than just covered calls . . .

Buy Back & Roll Out - The Math Exercise

This SysCW Buy Back & Roll Out  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.

The position is not over until it's over!

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The Email Comments:

There just seems to be no reason not to roll this position. In this case $3.60 per share is added to the position, which is rather amazing given the relationship between the strike price ($17.50) and the current stock price ($10.20). For this message, the entire history of this position as maintain with the Position Tracker is provided below the Math Exercise. Remember, part of the process is ‘knowing’ where you are with each position.

Have a great day!

The Covered Writer

Additional Comments:  One of the hardest things to do as a covered writer is to ignore  the 'value'. This is because we are conditioned to believe that we make money when things appreciate (assuming a long position).  The price of biotech stocks ebb and flow as news of various trials becomes public. AGIX is currently depressed, but the writer has generated a substantial amount of cash with this holding.  Stated another way . . . when, or if, this stock makes it back to the purchase price, the position will have generated a profit of over 60% as it stands right now.  Will that happen?  Nobody knows, but could it happen?  Yes.

Think of how much better of the covered writer is over a stock investor or mutual fund manager that just owns the stock.  They have to wait for the stock to get back to the purchase price . . . just to break even.  Or act out of fear, and sell the stock at a loss. The premiums are high with the stock losing value.  It will be interesting to see what happens to the premiums if the stock begins to recover.

Systematic Covered Writing
… more than just covered calls …
Buy Back & Roll Out          The Math Exercise
Date of Transaction	Thursday, December 28, 2006
Stock Symbol	AGIX	Current Stock Price		$10.20
Number of Shares	500	Existing  Strike Price		$17.50
Net Investment	$9,326.50	Ask price for Buy Back Option		$0.40
Net Cash Generated (1)	$4,636.55	Bid price for Roll Out Option		$4.00
Strategy:  Use the Systematic Covered Writing BB&RO strategy.
Purpose:  Prevent an existing option from being exercised and generate cash.
Step 1:  The Buy Back	Net cash needed to Buy Back option.			$213.25
Step 2:  The Roll Out	Net cash received from the sale of Roll Out option			$1,986.75
Step 3:  The Cash Generated	Net result of the Buy Back & Roll Out			$1,773.50	(A)
Total Cash Generated after BB&RO			$6,410.05
Net Percentage of the Investment Generated (2)			68.73%
Net Back to cash Gain if this New Option is Exercised			$5,816.55	(B)
Net Back to Cash Percentage Gain if Exercised (3)			62.37%
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 enter the transitions 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 percentage because the data does not indicate the duration of the position.

 

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN AGIX 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: 02/05/07