Dollar Cost Averaging

"Systematic Covered Writing is a series of strategies for long-term investors that believe nobody really consistently knows which stock is going to appreciate at any particular point in time. They also believe there are a limited number of possible overall changes in any individual stock's value during a specified period of time and that someday the value of a stock will be higher than when it was originally purchased. Lastly, they understand that their wealth is not emotionally connected to any individual stock held within the portfolio."

There are a number of strategies within the SysCW philosophy, and they all match up to an eventual outcome of a covered position. Visually, the information on strategies could be summarized as follows:

Covered Outcome	SysCW Strategy
Stock Appreciates Significantly	Allow the Option to be Exercised
Stock Appreciates	BB&RO, BB&RO&Up or allow Assignment
Stock trades Sideways	BB&RO, BB&RO&Up, allow Assignment, or Recover
Stock Depreciates	Recover After Expiration
Stock Depreciates Significantly	Establish TDS (?), Recover with Interim Strike, or Dollar Cost Average

Unfortunately, there will be times when the stock that is selected loses significant value. The Initial Option will just expire with you holding the stock and the cash generated from the sale of the option. Significant loss in value is one of the five events that 'can happen'. The question becomes, what do you do when it does happen?

The SysCW strategy you may choose to use when stocks lose value is called the Dollar Cost Averaging. ($CA) strategy. The fact that this can occur is one of the reasons it is suggested that you only purchase '100 share' positions initially. You could look at the depressed stock two ways. One would be to question why you paid so much for it in the first place and the other, more palatable view, would be that the stock is now on 'sale'. Keep in mind that because you are a long term investor, an option expiration is not necessarily a 'bad' event, but rather one of the 'known' possibilities.

The Dollar Cost Averaging strategy is designed to take advantage of stocks in your portfolio that are 'on sale'. By increasing the number of shares, you end up lowering the cost basis of the original position. For example, imagine if you purchased 100 shares of ABC stock for $40 a share and sold a $35 call. As the expiration of the option arrives, you find that the stock is now trading at $30 a share. When this happens, you simply wait for the option to expire. At this point in time you will still own 100 shares of ABC stock, which is now worth $30 per share. You will also keep 100% of the premium (cash) you received from the sale of the $35 call.

The Dollar Cost Averaging strategy suggests that you purchase an additional 100 shares at $30. After this second purchase, you will have a '200 share' position with a cost basis of $35. (100 @ $40 + 100 @ $30 = 200 @ $35) It may seem obvious, but it is a lot easier for a stock that is trading at $30 to appreciate back up to a 'break-even' of $35 than it is for it to gain the entire $10 loss in value. Once you purchase the second 100 shares, you could sell a $35 call with no worry of it being exercised because $35 is the cost basis of the underlying stock. It is key to remember that with Systematic Covered Writing, the investor is attempting to generate profit via the call options and not necessarily through the capital appreciation of the underlying stock.

Once again, the clearest way to understand this strategy is to see historical examples of its use. The $CA strategy is a fundamental strategy within the Systematic Covered Writing system.

Start	If the Stock	Use this SysCW Strategy
		All Accounts	Taxable Accounts