Systematic Covered Writing

... more than just covered calls!

Buy Back & Lower Example

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The Buy Back & Lower strategy is one to be used by those writers who are willing to increase the risk on a given position. It is an important Systematic Covered Writing strategy as it allows a writer to add additional cash to a position over the same period of time.  Caution should be used, for if the stock appreciates above the lowered price, action will be needed to prevent the stock from being sold at the lower price.  But . . . that's one of the reasons there is a Buy Back & Roll Out & Up strategy.  So . . . this is the 'Do you feel lucky?' strategy for the SysCW process?

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SHLD   Sears Holdings Corporation

THE DATE: July 24, 2006

THE STOCK: Sears Holdings Corporation (SHLD) wholly owns Sears and Kmart subsidiaries, and is the third largest broad line retailer in the U.S.

COMMENTARY: Yes, we are talking about the local Sears store!  Hard to believe that this stock works for Systematic Covered Writing, but . . . let the Position Tracker tell the story.

Here is an example where the Buy Back & Lower strategy worked as planned.  The original call was the 2006 Jan $140, which was sold on June 9th, 2006.  In September, the price of SHLD had dropped, and the writer decided to add some cash to this portfolio at that time.  Keep in mind the BB&Lower strategy is a two edged sword!  If the lower option expires . . . the strategy works.  If the lowered option needs to be rolled, the writer would have been better off sticking with the previous strike price.  Please use caution when using this strategy! 

With that said . . . look at the two possibilities the writer was faced writer with in September of 2005.

1. The Jan $140 call was in place and the writer could have elected to just let the option run it's course.  In hind sight, we now know that this strike price was higher than the trading price in January, so the option would have expired.  With this plan . . . the writer would have the 100 share or stock and $1,991.66 in premium received from the sale of the option, which is simply the Initial Call option expiring.
2. The writer decided to Buy Back the Jan $140 call and sell the Jan $135 call in order to add a little cash to the position.  Note . . . $428.25 was used to close the $140 strike and $641.72 was received for the $135 strike. The net difference of $213.47 was added to the account on September 22, 2005.

Note that after January expiration (the same time frame as (1.) above, the writer still has the same 100 shares of stock, but now instead of $1,991.66, the writer has $2,205.13.  Keep in mind that the value of SHLD is the value . . . whatever it was . . . it was, meaning it has little to do with the discussion.

Now there are some that would want to talk about commissions and extra work and all the other excuses folks come up with for not doing this or that, but the writer always looks at it in the following manner.  If you walked out the front door and there was $213.47 in cash lying on the ground . . . would you pick it up?  Enough said.

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As of November 10, 2006, the stock has recovered and appreciated! Since the BB&Lower option expired, the writer established an Interim Trade, which was rolled back to the original $140 strike price using the SysCW Buy Back & Roll Out & Up strategy.  This position will probably go back to cash sometime during 2007 . . . this is assuming the price holds or appreciates going forward. In the mean time, the cash that has been generated because this stock is owned can be used to establish other positions in the portfolio.

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN SHLD 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!

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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 © 2005. All rights reserved.
Revised: 02/05/07