Systematic Covered Writing

... more than just covered calls!

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Dollar Cost Averaging is an important Systematic Covered Writing strategy. Having something to do, other than giving up, when a stock loses value allows writers to cope with an ever changing market place.  Some would say to just dump the losers and move on.  Many actually follow that philosophy, and the covered writer believes there are two 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 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.

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DNDN - Dollar Cost Averaging Example

THE DATE: September 1, 2007

THE STOCK: Dendreon Corp. (DNDN)  is a biotechnology company focused on the discovery, development and commercialization of therapeutics that harness the immune system to fight cancer.

EXAMPLE TYPE:  This is an example of the Dollar Cost Averaging strategy of SysCW. The rational behind this strategy lays in the fact that the stock will reach the lower 'averaged' price before is reaches the pre-averaged price. This is a somewhat obvious statement, but it is an admission that at some point, the value of the underlying stock is important.

COMMENTARY:  Here we have an older example of Dollar Cost Averaging.  The example is intended to not only illustrate the positive effect of this strategy on this position, but also to provide an example of portfolio management.

So . . . as of September 1^st, you may be wondering . . . what's to manage?  The current option does not expire until January.  Okay, but in looking at the current prices for options, there is an opportunity available to bring the amount of cash generated to over 80%!  Check out the current prices of the Jan $7.50 and the '09 Jan $7.50 LEAP. 

It would appear (as of today) that the Jan $7.50 call could be closed for $0.80 a share.  The current Bid for the LEAP is $4.10!  What would happen if the position were rolled on September 4th . . . assuming that the Bid and Ask remain at their current levels?  Take a look at the following hypothetical . . .

To the writer . . . this becomes a 'no brainer' . . . just do it!  For some reason, the '09 LEAP is 'rich' in extrinsic value. Could it still be this high in January of 2008?  Yes, no, maybe so . . . is the real answer, which the writer tends to express as Nobody Knows!

This hypothetical is possible because the writer followed the SysCW process back in April of 2005 and Dollar Cost Averaged the position.  Being a long-term investor allows positions like this to 'do their thing'. Opportunity is knocking . . . the writer will respond on Tuesday, September 4, 2007.  (Gosh . . . someone somewhere would probably contend that this was a forward looking statement!)

Note:  DNDN with the '09Jan $7.50 LEAP would also make for an impressive SysCW Initial Position.  Just a thought.

SEPTEMBER 4, 2007

The 'thought' is no longer hypothetical . . . here are the results of rolling the position this morning:

DNDN was up slightly and the Ask price to close the 2008 options ended up being $0.85 instead of $0.80.  Needless to say, the writer will take the 80.74% cash generation from a stock that is still trading below its cost basis.

Please direct comments or questions to rlcoveru@eavecable.com.

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN DNDN 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!

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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 © 2007. All rights reserved.
Revised: 09/04/07