THE TRADE DATE : June 26, 2007
THE STOCK: Celgene Corporation (CELG) is a multinational integrated biopharmaceutical company.
THE STRATEGY: Close it or Wait?
THE THEORY: This
example is an illustration of position management using Systematic Covered Writing strategies. More
often than not, the writer will establish long-term covered positions. While some strategist suggest short-term positions with the
requirement that they need
to be repeated continuously in order to generate the 'expected' yearly profit, the writer tends to establish longer term holdings
for reasons that have been explained previously. One of the benefits of the SysCW process is added cash that is generated
at the time the options are sold can be combined to establish additional Initial Positions to further compound the cash generation
process.
You will find two sections on this Web site to view Closed Positions. One is this one, where a
given position is manually closed by buying back the exisiting call option, and then selling the underlying stock. The other Closed
Positions can be found in the Assignment section. The call options
are allowed to be exercised on or before expiration and the underlying stock is sold at the specified strike price. Either way,
the position is back-to-cash, which means the actual profit for both the period and on an annualized basis can be determined. Please
note . . . the shorter the duration, the less reliable the annualized rate of return.
THE COMMENTARY: The
interesting aspect of this closed position occurred in November of 2006. The writer delayed closing this position from November
to February of 2007 in order to create a realized capital loss. Note that the Nov $22.50 call options have a unique trading symbol. The
'08Jan $22.50 LEAP option is not the same equity as the Nov $22.50 call option and as such the loss created by closing the Nov $22.50
call (there is both a buy and a sell) can be reported for the 2006 tax year.
Needless to say, all the writer did
was delay the gain from one year to the next, but there is an advantage to keeping funds in the portfolio for an extra year. None of
this has anything to do with the actual results of the position. The investment ended up generating $1,083.98 in 581 days which
works out to 16.84% per year.
When stocks appreciate significantly, there is nothing wrong with closing the position and beginning the process over
again with another stock. CELG continues to this day (August 2007) to be used as an SysCW covered call position.
Your questions, comments, and or opinions are always welcomed and encouraged. rlcoveru@wavecable.com
PEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN
CELG 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!
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:
08/05/07
