Systematic Covered Writing

... more than just covered calls!

Close it or Wait Example

This is the 'go back to cash' Systematic Covered Writing strategy, which is respectfully named "Close it or Wait". There may be times when cash is needed for a variety of reasons, or it is possible that a stock has really appreciated and the question becomes, should the writer wait, or should the writer just go back to cash.

As with all SysCW examples, the transactions listed in the information that follows took place on the dates listed.  Note that historical executions of various transactions may, or may not, be repeated in the future.

ICOS    ICOS Corporation

Email Commentary:

Some Close it or Wait positions become no brainers.  With this position, the writer is going back to cash on an Initial Position that was established on Jan. 24, 2006 with the purchase of the stock and the sale of two ’08 Jan $25 LEAPS.  The ‘math’ speaks for itself.  The position ends with a gain of 21%  (not annualized) , and frees up over $4900 in cash. 

Gosh . . . the writer wonders if the $134 can be made up with that amount of cash between now and January 2008 . . . thus . . . the description . . . no brainer!

The Covered Writer

 

           
Systematic Covered Writing  
… more than just covered calls!  
         
Close it or Wait?    The Math Exercise  
           
The Position:        200 ICOS with '08 Jan $25 LEAP  
           
Stock Symbol ICOS   Current Price $32.53  
           
Number of Shares 200        
           
Net Investment $4,974.80 Existing Strike Price $25.00  
           
Net Cash Generated (1) $1,170.46        
         
Strategy:  Use Systematic Covered Writing to Maximize Cash Generation  
         
The Question:  Is it better to close the position now, or just wait for it to be called?  
           
Step 1: Determine the back-to-cash result of closing the position today.    
           
Ask price for the option $8.20 Net cost to close Option $1,650.00  
           
  Net proceeds from stock sale at current price $6,499.00  
           
  Net Back-to-Cash amount generated $1,044.66  (A)
           
  Net Back-to Cash percentage gain 21.00%  
           
Step 2: Determine the back-to-cash result of the existing option being exercised  
           
Net proceeds from the stock sale if the option is exercised $4,983.00    
           
Net Back-to-Cash gain if the option is exercised $1,178.66  (B)  
           
Net Back to cash percentage with assignment 23.69%    
           
           
If the position is closed now, you will wind up with the amount shown in box (A)    
If you wait for the option to be exercised you will have the amount in box (B)    
           
You are not quite ready to decide.          
           
There are two key data points that must be considered.  These points are the    
key to answering the question - "Should you close it . . . .or Wait?" The first issue  
is how much cash will become available if the position is closed now?    
  Available Cash    $4,849.00  
           
The next question has to due with the potential cash gain that is 'lost' or 'given back'  
by closing the position early.  In other words, if nothing is done, and the call is allowed  
to be exercised, how much additional cash would this position generate?    
    Cash 'Lost' . . . $134.00  
           
Now you are ready to decode!  Can you replace the cash that is given back by   
closing the position early with the proceeds that become available.    
           
           
           
           
In order to close a position early, you must be able to generate more than the difference  
between (A) and (B) with the cash that becomes available when the existing position is   
closed.          
           
           
(1) The net cash generated is the total amount of cash generated to date by this position.