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
significantly
appreciated, and the question becomes, should the writer wait for expiration, or should the writer just go back to cash.
As with all SysCW
examples, the transactions listed within 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.
"REALITY: It is only when a position
goes back to cash that the actual 'profit' or loss can be determined. This truly is a case of 'it's not over until it's over".
During the active holding period cash is generated. When the position is closed, the net result of buying and selling of the
stock is factored into the 'cash generation' equation.
RIMM Research In Motion
ENDING COMMENTS: At some point in time a writer makes the decision to 'take the money and run', otherwise
known as closing a position. Subscribers received an email message on November 5, 2006 that this position was closed. In this
case a long-term call was purchased to close the option portion of the trade, and then the stock was sold.
Take a look at the entire history of this position as maintained in the Position Tracker.
In September the $65 call was rolled to the '09 Jan $70 LEAP. The thought at that time was possibly this stock would lose
value in the short run. The stock was trading at $85.27 at the time. Well . . . so much for a pull back, given that the stock
was sold on December 5th for $135.79.
Note that even though a significant amount of premium was 'given back' by closing the position early, there was also almost
$6,000.00 in cash that became available. This amount is the difference between the cash used to close the call option ($7,668.25),
and the cash received from the sale of the stock ($13,571.59).
One final thought is the annualized return of 22.60%. It is worth noting that given the duration of this position was in
excess fo twelve months, the return on a yearly compounding is 'real'. If a position is closed after a month, or six months,
or any other period short of a year, then the transaction would have to be repeated in order to achieve a stated annualized gain.
The writer will 'take the money', but running is not an issue, a portion of the funds will be removed from the portfolio, and the
balance will be put back to work. Just as a reminder, this position was held in the 100k Portfolio.
Questions are welcomed - rlcoveru@cox.net
The Covered Writer
PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN
RIMM 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! STRATEGIES INVOLVING TAX ISSUES SHOULD BE DISCUSSED WITH YOU TAX PROFESSIONAL.
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:
02/23/11