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.
Dollar Cost Averaging Example
THE DATE: January 4, 2007
THE STOCK: Nam Tai Electronics (NTE) develops, makes and sells consumer electronic products, primarily to original equipment manufacturers, from its facilities in China.
COMMENTARY: NTE is a stock that is selected because of the dividend paid to stockholders by the Company. Currently, this dividend amounts to $38 per 100 shares on a quarterly basis. At the purchase price of today's shares, the dividend yield amounts to 9.93%, but one should also note that the company has a new CEO, and there is no guarantee that the dividend will continue. This is always the case with dividends. The dividend for this company has risen significantly over the past five year, which is normally construed as a positive indicator. Of course, from the SysCW perspective . . . nobody knows.
| 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 | 5-Jan-07 |
| 25-May-06 | Initial Stock Purchase | Buy 100 NTE @ 22.11 | ($2,218.00) | $1,518.00 | |||
| Current Price | $15.18 | Nam Tai Electronics, Inc. | |||||
| 25-May-06 | Initial Call Option | Sell Dec $22.50 call @ 1.45 | Expired 12/18/06 | $136.74 | |||
| 24-Jul-06 | Dividend Received | $38.00 | |||||
| 24-Jan-06 | Dividend Received | $38.00 | |||||
| 4-Jan-07 | Dollar Cost Averaging | Buy 100 NTE @ 15.23 | ($1,530.00) | ||||
| $CA | $3,748.00 | 200 @ $18.74 | Combined 200 Share Position | ||||
| 4-Jan-07 | Sell two Jun $17.50 calls @ .55 | $100.49 | |||||
| Cash in Hand | 8.36% | $313.23 | |||||
The purpose of the Dollar Cost Averaging is two fold.
As is typical for dividend paying stocks, the premiums for call options are towards the low end of the scale. By increasing the number of shares not only will the writer receive twice the amount in dividends, but also the premium, each time a call is sold is higher, which helps offset the cost of the transaction.
If the stock is going to stay in the $15 range for a while, the need to decrease the cost basis becomes greater. Note that if this position is going to end profitably, the price of the stock must be close to the strike price. Currently, this stock does not even offer options above $17.50, so the need to Dollar Cost Average becomes even more evident.
Two hundred shares of this stock in this portfolio is 'reasonable'. It is a piece of the puzzle. Some positions generate more than others from time to time, and then the pendulum swings, which is why diversification is important. Check out the amount of cash NTE has sitting on the sidelines for an additional reason behind increasing the number of shares.
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 NTE 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