Systematic Covered Writing

 . . . more than just covered calls . . .

Buy Back & Roll Out Example

DNDN       Dendreon Corporation

THE TRADE DATE: May 9, 2007

THE STOCK: Dendreon Corporation (DNDN) is a biotechnology company focused on the discovery, development and commercialization of therapeutics that harness the immune system to fight cancer.

THE STRATEGY: The Buy Back & Roll Out strategy has two purposes:

  1. The strategy is used to extend a covered position and prevent the underlying stock from being assigned.

  2. The strategy is used so that an asset, held within a portfolio, can generate additional cash.  The 'asset' is the stock position, which has a constant cost basis throughout the holding period.

THE COMMENTARY:  Today's use of the Buy Back & Roll Out strategy is based on the second purpose listed above.  With the news that the FDA wants certain conditions met before they will grant approval for their drug the stock lost over 60% of its 'value'. For this particular DNDN position this action brought the stock back down below the May $7.50 strike price. Take a look at the history of this position. . .

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
    SysCW   Position Tracker    
               
Historical Data Open Position  
        Stock Cash Total Cash Value as of
Date Strategy Status Position Investment Generated Generated 9-May-07
5-Jan-05 Initial Stock Purchase Buy 100 DNDN @ 10.129 (1,019.90)      $        775.00
  Current Price $7.75 Dendreon Corporation        
5-Jan-05 Initial Call Option Sell Aug $10 call @ 2.35 Expired 8/20/05 $226.74    
22-Aug-05 Dollar Cost Averaging Buy 100 DNDN @ 5.5999 (566.99)      $        775.00
$CA $1,586.89 200 @ $7.93 Dollar Cost Averaging        
22-Aug-05 Continued Trade Pt 1 Sell two Feb $7.50 calls @ .60 Expired 2/18/06 $110.49    
20-Sep-05 Dollar Cost Averaging Buy 100 DNDN @ 6.8986 (696.86)      $        775.00
20-Sep-05 Continued Trade Pt 2 Sell Feb $7.50 call @ .90 Expired 2/18/06 $81.74    
$CA $2,283.75 300 @ $7.6125 300 Share Combined Position        
21-Feb-06 Continued Trade Sell three '07 Jan $7.50 LEAPS @ .95 Expired 1/20/07 $274.24    
23-Jan-07 Continued Trade Sell three May $7.50 calls @ .60 Rolled 5/09/07 $169.24    
9-May-07 Buy Back & Roll Out Buy thee May $7.50 calls @ .50   ($160.75)    
9-May-07 Continued Trade Sell three '09 Jan $7.50 LEAPS @ 3.20   $949.23    
               
  Cash in Hand 72.29%       $1,650.93  

As a reminder, the goal of Systematic Covered Writing is to generate 15% per year (on average) with investments in a portfolio using the strategies of SysCW. With this in mind, consider this position after today's activity.

Needless to say, over the coming months it is possible for the FDA to grant an approval based on additional data.  The stock would appreciate.  Or, the opposite could happen.  At this point in time . . . nobody knows, which is exactly why the writer generated an additional $788.48 in downside protection by using the Buy Back & Roll Out strategy today (May 9th). 

The compelling reason for rolling this position today is the 72.29% cash generated.  Keep in mind that the writer can use the $788.48 over the next year and a half in other transactions. Yes, it's a bummer that DNDN was not approved, but it certainly is not a disaster.  For every transaction, there is a winner and a loser. The real losers with this stock are the investors that purchased it long, or bought the calls during the last couple of weeks.

Comments, questions and opinions are always welcome . . . rlcoveru@wavecable.com

The Covered Writer

PS:  For DNDN positions with May calls that are above $7.50, the writer will allow the calls to expire worthless on May 19, 2007. The positions will then be Recovered After Expiration.

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN DNDN 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! STRATEGIES INVOLVING TAX ISSUES SHOULD BE DISCUSSED WITH YOU TAX PROFESSIONAL.

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 © 2006. All rights reserved.
Revised: 05/10/07