KCI 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.

Closed - Dollar Cost Averaging Example

THE DATE: March 2, 2007

THE STOCK: Kinetic Concepts, Inc. (KCI) is a global medical technology company that manages advanced wound care and therapeutic surfaces.
EXAMPLE TYPE: This example could be located under a number of headings. The Initial Position was reported to subscribers via email on June 6, 2006. After more than a 32% loss in value, the Combo Buy Back & Lower transactions were emailed on August 8, 2006, and then today, March 2, 2007, the position was closed, with the data also being emailed to subscribers. Maybe because it required the most conviction (believe in the process), the covered writer decided the Dollar Cost Averaging transactions were the stimulus for a detailed example.

COMMENTARY: With the market trading sharply lower this week, looking at an example where the Initial Stock Purchase lost a good deal of value might be appropriate. Note that there was no panic involved in liquidating this position today. (The Dow lost over 100 points on Friday March 2, 2007. The Position Tracker data for this position verifies the end result.

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

Historical Data			Closed Position
				Stock	Cash	Total Cash	Annualized
Date	Strategy	Status	Position	Investment	Generated	Generated	Return
6-Jun-06	Initial Stock Purchase		Buy 100 KCI @ 39.77	($3,978.00)
			Kinetic Concepts, Inc.
6-Jun-06	Initial Call Option		Sell Jan @ 40 call @ 8.50	Lowered 8/8/06	$849.00	Email 6/06
8-Aug-06	Combo BB& Lower		Buy Jan $40 call @ .80		($89.25)
8-Aug-06	Dollar Cost Averaging		Buy 100 KCI @26.7299	($2,679.99)
$CA	$6,657.99	200 @ $33.29	Combined 200 Share Position			$1,629.22
8-Aug-06	Appreciated Trade		Sell two '08 Jan $35 LEAPS @ 4.40		$869.47	Email 8/08
2-Mar-07	Buy Calls to Close Option		Buy two '08 Jan $35 LEAPS @ 17.10		($3,429.50)
2-Mar-07	Sell Stock to Close Position		Sell 200 KCI @ 49.3601	$9,864.71	$3,206.72	Email 3/2/07
2-Mar-07			Net Cash Gain			$1,406.44	Annualized
269	Days		Net Percentage Gain			21.12%	28.66% MG

The closing of the position was based on the desire to raise cash as the email comments stipulate:

The Initial Purchase of KCI was reported to subscribers on January 6, 2006. Then, when the writer decided to use the Dollar Cost Averaging strategy in August of 2006, subscribers received that notification also. Today, the position was closed . . . and here is why:

First, because the writer wants cash available for upcoming ‘deals’.

Next, the math indications that the position can be closed at a profit that is above the SysCW guidelines. (Don’t get excited, it’s just a piece of the puzzle, or a tree in the forest.)

Finally, the Close it or Wait math ends with this question: Can the writer generate at least $547.98 with $6,435.02 between now and January 2008? Answer . . . . . well Dah!

The process is simply. Plug the figures into the Close it or Wait Math Exercise and take a look at the two figures that are presented at the very end of the Excel sheet. Yes, the writer is giving back $547.98 in potential gain for the right to generate a larger gain.

The Close it or Wait Math exercise was included with the email message. Keep in mind there are other thoughts involved. For example, even though the Company has had five quarters in a row of exceeding year over year earnings, the analytical community only rates this stock as a hold. Of course these 'experts' were saying to hold it when it went from $39.77 to $26.73, and they are still saying to hold it now that it is trading at $49.70, which is where it closed today. Curious . . . shouldn't there have been a 'buy' recommendation in there some where? Or maybe . . . . nobody knows!
From the writer's point of view, if the stock appreciates, the odds of rolling the $35 strike price for a reasonable additional gain are slim. So . . . that being the case, it makes perfect sense to close the position early. The reason why is in the math. The writer spent $3,429.50 closing the '08 Jan $35 LEAP position. This is cash out of the portfolio. Then the writer sold the stock bringing in $9,864.71 in proceeds. The difference between the cash in and the cash out is $6,435.21. Keep in mind this is not profit, this is simply the effect on the cash balance in the account.
The profit for the closed position is the $1,406.44 amount, which you can find in the Position Tracker data above. This example is what the writer would call a 'blackboard trade'. You know . . . the one's they draw up on the blackboard to show you how well an idea works (after the fact)! There's a difference though . . . the writer has had this position on the blackboard since June 2006. Right?

One of the key observations to take from this example, in light of recent market conditions, is the net back to cash gain and annualized return this position generated, even though it lost over 32% of its initial 'value'.

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 KCI 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!