Systematic Covered Writing

... more than just covered calls!

COMBO - Buy Back & Lower Example

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.  When this strategy is combined with a purchase of additional shares, a writer is accomplishing two things at once.

1. When isolating the exisiting position, a call option is being closed and replaced with another.  The net effect is the same original investment has generated additional cash.
2. By purchasing more shares, the writer is taking advantage of the long term effect of Dollar Cost Averaging.  Needless to say, premium is also being generated with the call sold against this new purchase.

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SNDK   SanDisk Corp.

DATE -  November 13, 2007

PURPOSE -  This current holding is not in any kind of  'distress' at the moment. The position has been in existence since January 2007, and as of today has generated 25.77%. The price of the stock is only about $6.00 below the cost basis so it's not like there is any significant reason to take action on this position.  Take a look at the data . . . and then you'll find out the 'why' below the Position Tracker.

WHY? - The market experienced tremendous volatility during November 2007.  Today, for example, the DOW closed up over 300 points! Throughout the past few days, SNDK has remained relatively stable. The writer basically decided that increasing this holding from 100 share to 200 shares would be worthwhile.

Consider the position above for a moment.  What would happen with this holding over the next six months?  Unless there was a major price swing, the correct answer is provably nothing. The investment ($4,263.73) has generated the 'Cash in Hand' ($1,098.68)and the current option does not expire until January 2009 . . . so there really would not be any reason to do anything.

Now notice that the current strike price is above nine dollars ahead of the current trading price, and $5 above the purchase price. Now factor in the desirability of this stock. Yes, this is subjective, but if you check out this company in detail, it's the type of Company that one would like to work for.  The make a great product, and the only real threat to their leadership position would be some new type of memory storage which is not based on flash memory.

THE STRATEGY -  By increasing the number of shares, the writer could lower the existing strike price and lower the cost basis from $42.64 to about $40 a share.  Take a look at the position as it stands after the SysCW Combo Buy Back & Lower strategy was used.

Note that the cash in hand is now 27.04% instead of 25.77%.  One way to look at this, because the new figure is based on the combined two purchase investment, is that the original investment generated more cash today.  Recall that the position probably was not going to see any activity for at least six month!

The results are not Earth shattering, but the main rational behind the activity was the stability of the underlying stock.  Oh . . .stability and the value of a stock . . .  now there is an oxymoron statement once the reality of Nobody Knows comes into play.  So, lets just say that the writer 'likes' SNDK at around $40 a share enough to justify a two-hundred share porition.

FYI - This holding is in the online $50k Portfolio.

 

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN SNDK 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 © 2007. All rights reserved.
Revised: 11/14/07