Systematic Covered Writing

 . . . more than just covered calls . . .

Buy Back & Roll Out Example

JCOM    j2 Global Communications, Inc.  

THE DATE: December 18, 2006

THE STOCK: JCOM

THE STRATEGY: The Buy Back & Roll Out strategy is used to increase the amount of cash a position has generated while preventing an existing option from being exercised.

THE COMMENTARY:  For this example we will follow the history of this position over time.  The position began on March 8, 2005 as the Position Tracker indicates.

      Systematic Covered Writing    
              . . . More than just covered calls . . .    
    SysCW   Position Tracker  
             
Historical Data Open Positions
        Stock Cash Total Cash
Date Strategy Status Position Investment Generated Generated
8-Mar-05 Initial TDS Stock Purchase Buy 200 JCOM @ 41.1999 ($8,246.98)    
  j2 Global Communications, Inc.      
8-Mar-05 Initial Call Option Sell two Sep $40 calls @ 5.30   $1,050.46  
             
 Cash in Hand 12.74%       $1,050.46

On September 15, 2005, JCOM closed at $37.21, which was below the $40 strike price.  The September options expired and left the writer with 200 shares of stock, and the $1050.46 in cash generated with the Initial Call Option. Note that the call option was below the basic guideline of 15%.  The writer elected to take less downside protection by selling a six month option instead of selling a LEAP.  JCOM, for this writer, is considered to be a quality long-term stock, and for that reason the writer was willing to go with less downside protection. Remember, it's the total protection we are after, not necessarily on every position if there is a reason for having a stock in the portfolio.

On the Monday after expiration, the writer elected to split the Recover After expiration.  With two-hundred or more shares, some very interesting strategies can be used. For this stock, the thought was to leave the strike price at $40, but sell two different terms for the calls.  You can see this as the Tracker is updated below:

      Systematic Covered Writing    
              . . . More than just covered calls . . .    
    SysCW   Position Tracker  
             
Historical Data Open Positions
        Stock Cash Total Cash
Date Strategy Status Position Investment Generated Generated
8-Mar-05 Initial TDS Stock Purchase Buy 200 JCOM @ 41.1999 ($8,246.98)    
    j2 Global Communications, Inc.      
8-Mar-05 Initial Call Option Sell two Sep $40 calls @ 5.30 Expired 9/15/05 $1,050.46  
19-Sep-05 Continued Trade Pt 1 Sell Dec $40 call @ 1.65   $156.74  
19-Sep-05 Continued Trade Pt 2 Sell Mar $40 call @ 2.95   $286.73  
             
Cash in Hand 18.11%       $1,493.93

First, notice that the downside protection is now over the 15% minimum.  See the notation for the expired option.  The writer always enters how an option was closed in the Stock Investment column.  This is more as a historical reminder, which makes it easier to follow the option history.

Okay, so the strike price is the same  which means the position is in a Continued Trade status,  just with two different expirations.  One is a 2006 December $40, and the other is a 2007 March $40. This is like playing both sides of the fence . . . is it better to sell the shorter term call or the longer term?  The answer to that question should always be nobody knows. At the time, JCOM was trading at around $37 a share.

On December 2, 2005, JCOM was trading at $47.52.  The writer could elect to allow the Dec $40 call to be exercised, or he or she could elect to roll the option.  Again, because the writer wants to maintain a position with JCOM, the SysCW Buy Back & Roll Out & Up strategy was used to protect the position.

    SysCW   Position Tracker  
             
Historical Data Open Positions
        Stock Cash Total Cash
Date Strategy Status Position Investment Generated Generated
8-Mar-05 Initial TDS Stock Purchase Buy 200 JCOM @ 41.1999 ($8,246.98)    
    j2 Global Communications, Inc.      
8-Mar-05 Initial Call Option Sell two Sep $40 calls @ 5.30 Expired 9/15/05 $1,050.46  
19-Sep-05 Continued Trade Pt 1 Sell Dec $40 call @ 1.65 Rolled 12/02/05 $156.74  
19-Sep-05 Continued Trade Pt 2 Sell Mar $40 call @ 2.95   $286.73  
2-Dec-05 Buy Back & Roll Out & Up Buy Dec $40 call @ 7.50   ($758.25)  
2-Dec-05 Appreciated Trade Pt 1 Sell '07 Jan $45 LEAP @ 9.30   $921.71  
             
Cash in Hand 20.10%       $1,657.39

The Dec $40 call is closed and replaced with the '07 Jan $45 LEAP.  Note that the cash in ($921.71) is greater than the cash out ($758.25), which is a requirement of the strategy. The strike price was increased by $5 a share, which means another $500 would be added to the position over the previous strike price.  This portion of the position is now Appreciated because the strike is above the cost basis of the stock.

      Systematic Covered Writing    
              . . . More than just covered calls . . .    
    SysCW   Position Tracker  
             
Historical Data Open Positions
        Stock Cash Total Cash
Date Strategy Status Position Investment Generated Generated
8-Mar-05 Initial TDS Stock Purchase Buy 200 JCOM @ 41.1999 ($8,246.98)    
    j2 Global Communications, Inc.      
8-Mar-05 Initial Call Option Sell two Sep $40 calls @ 5.30 Expired 9/15/05 $1,050.46  
19-Sep-05 Continued Trade Pt 1 Sell Dec $40 call @ 1.65 Rolled 12/02/05 $156.74  
19-Sep-05 Continued Trade Pt 2 Sell Mar $40 call @ 2.95 Rolled 3/17/06 $286.73  
2-Dec-05 Buy Back & Roll Out & Up Buy Dec $40 call @ 7.50   ($758.25)  
2-Dec-05 Continued Trade Pt 1 Sell '07 Jan $45 LEAP @ 9.30   $921.71  
17-Mar-06 Buy Back & Roll Out Buy Mar $40 call @ 3.90   ($398.25)  
17-Mar-06 Continued Trade Pt 2 Sell '07 Jan $40 LEAP @ 8.60   $851.72  
             
Cash in Hand 25.60%       $2,110.86

On March 17, 2006, JCOM was trading back down to $42.78.  Again . . . the writer could let half the position be assigned with the Mar $40 call, but elected to roll the option instead.  Note that this time the strike remained at $40.  So . . . as of March 2006, the writer has two contracts expiring in January 2007.  One with a $45 strike price, and the other with a $40 strike price.  The position after one year had generated slightly over 25% of the net investment.

In May of 2006, JCOM completed a 2:1 stock split. At that time the writer then had 400 shares of stock with two '07 Jan $20 LEAPS and two '07 Jan $22.50 LEAPS.  The shares double and the strike prices are cut in half, but double the contracts. The writer stayed with this position until December 18, 2006. 

With the stock trading at $27.28, the writer decided to roll the entire position to the '08 Jan $22.50 option.  Observe that half the position is being rolled to the same strike price and the other half is being rolled from the $20 to the $22.50.  Here is the current historical data for this holding.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
    SysCW   Position Tracker    
               
Historical Data Open Positions  
        Stock Cash Total Cash  Value as of 
Date Strategy Status Position Investment Generated Generated 18-Dec-06
8-Mar-05 Initial TDS Stock Purchase Buy 200 JCOM @ 41.1999 ($8,246.98)     $11,348.00
Current Price $28.37 j2 Global Communications, Inc.        
8-Mar-05 Initial Call Option Sell two Sep $40 calls @ 5.30 Expired 9/15/05 $1,050.46    
19-Sep-05 Continued Trade Pt 1 Sell Dec $40 call @ 1.65 Rolled 12/02/05 $156.74    
19-Sep-05 Continued Trade Pt 2 Sell Mar $40 call @ 2.95 Rolled 3/17/06 $286.73    
2-Dec-05 Buy Back & Roll Out & Up Buy Dec $40 call @ 7.50   ($758.25)    
2-Dec-05 Continued Trade Pt 1 Sell '07 Jan $45 LEAP @ 9.30 Rolled 12/18/06 $921.71    
17-Mar-06 Buy Back & Roll Out Buy Mar $40 call @ 3.90   ($398.25)    
17-Mar-06 Continued Trade Pt 2 Sell '07 Jan $40 call @ 8.60 Rolled 12/18/06 $851.72    
25-May-06 Now 400 shares w CB $20.62 2:1 Stock Split            
18-Dec-06 Buy Back & Roll Out & Up Buy two Jan $20 calls @ 7.70   ($1,549.50)    
18-Dec-06 Buy Back & Roll Out Buy two Jan $22.50 calls @ 5.30   ($1,069.50)    
18-Dec-06 Appreciated Trade Sell four '08 Jan $22.50 LEAPS @ 7.70   $3,067.90    
               
Cash in Hand 31.04%       $2,559.76  

This is how the position stands today.  The strike price is such that if the writer allows the current option to be exercised, over $700 will be added to the net cash generated.

This is an interesting example of splitting the option position.  Think about it . . . in 2007, the writer could re-split the holding with two different strike prices, on the same or different months, or three contracts at one position, and one at another.  For that matter, if the writer was feeling real frisky, four unique options could be sold.  What fun!

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

The Covered Writer

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! 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: 02/05/07