HEPH and Dollar Cost Averaging

Systematic Covered Writing

... more than just covered calls!

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:

It is the only 'plan' they have.

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.

HEPH - Dollar Cost Averaging Example

THE DATE: March 22, 2007

THE STOCK: Hollis-Eden Pharmaceuticals Inc. is a pharmaceutical company that is engaged in the development of small molecule compounds that are metabolites or synthetic analogs of adrenal steroid hormones.
EXAMPLE TYPE: This is an example of the Dollar Cost Averaging strategy of SysCW. It is also an example of why the writer prefers and recommends selling longer term calls with new Initial Positions. As you will see in this and other examples to follow, it's not like the writer ignores the idea, it's just that more often than not, if the stock loses value, a writer would have been better off going long.

COMMENTARY: First, let's cover the Dollar Cost Averaging aspect of this example. As you can see in the Position Tracker below, the Mar $5 call expired. With this position, even though the writer only went for a two-month duration, the premium provided over 18% downside protection. Obviously, the writer could use it, now that the stock is trading below $3!

			Systematic Covered Writing
			. . . More than just covered calls . . .
		SysCW Position Tracker

Historical Data			Open Position
				Stock	Cash	Total Cash	Value as of
Date	Strategy	Status	Position	Investment	Generated	Generated	22-Mar-07
31-Jan-07	Initial Stock Purchase		Buy 200 HEPH @ 5.53	($1,113.00)			$578.00
	Current Price	$2.89	Hollis-Eden Pharmaceuticals Inc.
31-Jan-07	Initial Call Option		Sell Mar $5 call @ 1.10	Expired 3/17/07	$210.49
22-Mar-07	Dollar Cost Averaging		Buy 100 HEPH @ 2.9199	($298.99)			$289.00
$CA	$1,411.99	300 @ $4.71	Combined 300 Share Position
22-Mar-07	Appreciated Trade		Sell '08 Jan $5 LEAP @ .50		$139.24

	Cash in Hand	24.77%				$349.73

The cost of an extra hundred shares was less than $300. The writer surely is not going to start a new position with $300 of cash in an account, so it seemed reasonable to lower the cost basis. Here is how I look at this:

    The premiums are minimal unless you go to the LEAP.

    Going out to January 2008 provides time for this stock to recover.

    The total premium generated to date, divided by the total investment (including today's purchase) is over 24%, which is well within the guidelines of SysCW.

    Part of the decision process is . . . there is not much one can do with $300!

    By Dollar Cost Averaging this position . . . the cost basis is now below the strike price.

Now let's move on to the long-term verses short term option. Yes, this is but one example, but I have many to follow for in January I captured the current option chain for over fifty stocks. The point I will attempt to illustrate is this: When establishing a new Initial Position, it is in a covered writer's best interest to following the 15% downside protection coupled with the 15% annualized return if assigned guidelines of Systematic Covered Writing.
The only way the short term covered calls will work out better is if you are consistently correct and the options are assigned. I contend that if a writer is that good at picking winning positions, they should not write the calls in the first place . . . because they are always picking stocks that are appreciating . . . right?
This position happened to fit the SysCW guidelines, even though the term was short. Is this the best of both worlds?   Check it out.
Here is the option chain for HEPH on January 22, 2007

Notice that In January, the '08 Jan $5.00 LEAP could have been sold for $2.30. Granted the stock was trading at $0.46 higher, so the option should have been higher than when the call was sold on January 31st. The key is that with the first call expiring, and the new call taking the position to the same strike and expiration, the total premium collected is only $1.60 gross, and there is an extra commission for selling the second call.

Yes, maybe this option would have been closer to $1.80, or $1.70, or for that matter even if it was $1.60, the writer would have been better off selling the LEAP in the first place. I think the learning comes from the acknowledgment that at times, stocks selected will end up losing value.
Now all we need is for the stock to be above the $5.00 strike price in January and this position will end in great shape thanks to the Dollar Cost Averaging strategy. One nice thing about putting these thoughts in writing is in the fact that we can revisit them in the future.
Please direct comments or questions to rlcoveru@eavecable.com.

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