Systematic Covered Writing

... more than just covered calls!

Dollar Cost Averaging Example

Dollar Cost Averaging is an important Systematic Covered Writing strategy. The strategy gives the writer something to do rather than the 'stop loss' approach of just giving up.  Stocks may lose significant value during the holding period, but this strategy allows writers to cope with an ever changing market place.  As mentioned, some would say to just dump the losers and move on.  Many actually follow that philosophy. The covered writer believes there are two specific reasons why this is so:

  1. It is the only 'plan' they have.
  2. They somehow think they will be 'right' with the next selection.

If there is no 'plan', what else would an investor do?  Many will continue to use stop losses or exit strategies.  The SysCW philosophy is to have a plan, and this is yet another example of this plan in action.  Some examples will be cases where the  Dollar Cost Averaging strategy was the latest strategy implemented, while others will illustrate the benefits of the strategy as the position continues to generate additional cash.

CYBX     Cyberonics Inc.

POSITION UPDATE: November 17, 2006

THE STOCK: Cyberonics Inc. - (CYBX) This company designs, develops, makes and markets medical devices for the treatment of epilepsy and other neurological disorders through vagus nerve stimulation.

STRATEGY TYPE:  This example involves a position where the Dollar Cost Averaging ($CA) strategy was used after an existing option expired. A great time to use $CA is once a stock is no longer covering a call.  Such was the case in January 2006.

COMMENTARY: The discussion begins with the historical data as maintained in the Position Tracker.  This data ends with the use the Buy Back and Lower strategy.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
    SysCW   Position Tracker    
               
Historical Data Open Positions  
        Stock Cash Total Cash  Value as of 
Date Strategy Status Position Investment Generated Generated 17-Nov-06
6-Jul-05 Initial Stock Purchase Buy 100 CYBX @ 44.35 (4,442.00)      $     2,158.00
  Current Price $21.58 Cyberonics, Inc.        
6-Jul-05 Initial Call Option Sell Aug $40 call @ 7.80 Rolled 7/20/05 $771.71    
20-Jul-05 Buy Back & Roll Out Buy Aug $40 call @ 3.50   ($368.25)    
20-Jul-05 Continued Trade Sell Jan $40 call @ 7.60 Expired 1/21/06 $751.71    
31-Jan-06 Dollar Cost Averaging Buy 100 CYBX @ 29.809 (2,987.90)      $     2,158.00
$CA $7,429.90 200 @ $37.24 Combined 200 Share Position        
31-Jan-06 Continued Trade  Sell two '07 Jan $35 LEAPS @ 3.90 Lowered 6/21/06 $770.47    
21-Jun-06 Buy Back & Lower Buy two Jan $35 calls @ .55   ($119.50)    
21-Jun-06 Interim Trade Sell two Jan $27.50 calls @ 1.5   $290.49    
  Cash in Hand 28.22%       $2,096.63  

New positions using CYBX are established almost monthly is various SysCW portfolios. It is interesting to point out with this example the fact that it is entirely possible for a stock to lose value after the $CA position is purchased.  Not a problem.  It's not like a covered writer can control the 'value'.  Rather than having shares with a $44.42 cost basis, the position is now at $37.24.

Looking ahead . . . pretend that it's January and the $27.50 calls just expired.  The writer could $CA the position again, or simply sell a new call against the existing 200-shares. As it stood on November 17th, the '08 Jan $25 LEAPS could be sold for $2.40 a share.  The position will see it's next activity as the January expiration approaches.

It is important to provide examples like this where everything is not working 'perfectly'.  The $CA purchase was made, but the stock continued to lose value. Subscribers will see over the months to come exactly how this situation will work out in the end.

THE POINT: Rather than taking a loss and 'hoping' the next pick would be a winner, the SysCW approach is to accept the winners, and work on the others until the position ends with a profit.  Will this profit be as high as the 'winners'?  Yes, no, maybe so.  The important issue is the fact that if the number of positions ending with a loss are next to none . . . then there is nothing to 'make up'.

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN CYBX 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 © 2005. All rights reserved.
Revised: 02/05/07