TELK - Buy Back & Roll Out

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.

This position was [originally] established on March 27th of this year. The stock continues it’s flirtation with the $17.50 October strike price. Always realized that as expiration approaches, a covered writer is playing a game of chicken with an option trader and or a market maker There is a different mind set to both styles of investing. I’ll be bold and say that as a writer . . .I do not like to lose . . .and because I don’t like to lose, I’m going to ‘take my ball and run’!

I closed this October call this morning and rolled the position out to the ’08 Jan $17.50 LEAP. Why? Look at the math as you consider the following:

• The ‘option trader’ can no longer purchase my stock in October for $17.50 a share. (Who won the game of chicken?)
• The $1864.70 investment has generated $1175.20 in 196 days! The writer has the money NOW, even though the call lasts until January 2008.
• The 63.02% cash generated can, and will, be used to purchase additional stock positions.
• If the new option is exercised, which in some cases means the writer ‘let’s’ the other guy win (sort-of), the net back to cash gain will be in excess of 55%. When does the writer know that? Just before the transactions are executed.

Look at this . . . One stock purchase and three option transactions, and the writer has 63% of the investment back in hand. For the covered writer’s mind set ( and peace of mind) . . . that beats the heck out of day or swing trading.

Continue to have a great day!


Systematic Covered Writing
… more than just covered calls …


Buy Back & Roll Out The Math Exercise

Date of Transaction	Monday, October 09, 2006

Stock Symbol	TELK	Current Stock Price		$17.77

Number of Shares	100	Existing Strike Price		$17.50

Net Investment	$1,864.70	Ask price for Buy Back Option		$0.70

Net Cash Generated (1)	$531.73	Bid price for Roll Out Option		$7.30

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.			$78.25

Step 2: The Roll Out	Net cash received from the sale of Roll Out option			$721.75

Step 3: The Cash Generated	Net result of the Buy Back & Roll Out			$643.50	(A)

Total Cash Generated after BB&RO			$1,175.23

Net Percentage of the Investment Generated (2)			63.03%

Net Back to cash Gain if this New Option is Exercised			$1,043.53	(B)

Net Back to Cash Percentage Gain if Exercised (3)			55.96%

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.