Systematic Covered Writing
... more than just covered calls!
BUY BACK AND ROLL OUT
The Buy Back and Roll Out (BB&RO) strategy is the heart of Systematic Covered Writing. The strategy will be explained, a challenge will be presented, and examples will be given. You are going to prove for yourself how the BB&RO strategy can be used to accomplish the two purposes which are as follows:
To prevent an existing option from being exercised.
To add additional cash to the portfolio.
If the stock price is above the strike price on expiration Friday, the stock will be sold. Period! SysCW is quick to point out that while this stock being 'called' scenario is absolutely true, it is only going to happen if the writer chooses to do nothing! This strategy answers the question of how is a call writer going to prevent a stock from being called? Tie in the principle that a covered writer is willing to be a long-term investor and one has yet another purpose for this strategy. There may be positions that writers 'want' to keep in a portfolio.
Remember how a covered position is established. The writer sold someone, (he or she does not care who), the right to buy stock at a pre-determined, specified price, on or before a pre-determined, specified date. For that 'right', the call writer received some cash which was added to the portfolio. The covered writer does this because he or she agrees that the only way one will ever make any money, is if he or she sells something. Covered writers are just doing the whole 'buy and sell' process backwards. As far as the option holding is concerned, call writers sell something before they buy, namely the call option.
A covered writer sells someone a 'right'. The writer can take this 'right' away by simply buying the 'right' back. This is going to sound ridiculous, but that's all you have to do in order to avoid having your stock sold. The SysCW solution to preventing stock from being sold is to buy back the option that was sold, and then immediately sell a new option at the same strike price. The only difference is the expiration month. The covered writer selects an expiration month from two to six months farther out. This second step of the two step Buy Back and Roll Out strategy is known as the Roll Out. Can you really do this? You bet! Is it easy to do? Absolutely! Remember, in order for an investment system to be worth considering, it must be simple and it must be duplicatable.
Let's get to the RULES for this strategy.
