Systematic Covered Writing
. . . more than just covered calls . . .
"Systematic Covered Writing is a series of strategies for long-term investors (covered writers) who believe nobody really consistently knows which stock is going to appreciate at any particular point in time. They also believe there are a limited number of possible overall changes in any individual stock's value during a specified period of time and that someday the value of a stock will be higher than when it was originally purchased. Lastly, they understand that their wealth is not emotionally connected to any individual stock held within the portfolio."
OVTI OmniVision Technologies
THE EXAMPLE DATE : September 3, 2007
THE STOCK: OmniVision Technologies. - (OVTI) produces single-chip sensors (CameraChips) for capturing images in digital still cameras, cell phones, security and surveillance cameras, and video game consoles.
THE STRATEGY: The effects of using the SysCW Dollar Cost Averaging strategy.
THE PURPOSE: The Dollar Cost Averaging strategy is used when a stock has lost value. The idea of investing additional funds into a stock that has depreciated is sometimes a hard pill to swallow, because 'nobody knows' what will happen next. One thing for sure, a position will 'get back to even' much sooner if the cost basis is lowered. The other advantage of adding additional shares is derived from future opportunities to split option sales between two different strike prices.
If the portfolio is held in a taxable account, a covered writer would normally execute a TDS position before using the Dollar Cost Averaging strategy.
THE COMMENTARY: When an example looks back at history it is important to realize that although hindsight is twenty-twenty, current positions would not exist unless faith was placed in the strategy being used. The Position Tracker presented below shows the entire history of this position.
| 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 | 2-Sep-07 |
| 30-Jan-06 | Initial Stock Purchase | Buy 100 OVTI @ 25.2172 | ($2,008.86) | $2,087.00 | |||
| Current Price | $20.87 | OmniVision Technologies Inc | |||||
| 30-Jan-06 | Initial Call Option | Sell Sep $25 call @ 4.40 | Expired 9/16/06 | $431.73 | |||
| 19-Sep-06 | Dollar Cost Averaging | Buy 100 OVTI @ 14.3261 | ($1,439.61) | $2,087.00 | |||
| $CA | $3,448.47 | 200 @ $17.24 | Combined Position | ||||
| 16-Sep-06 | Appreciated Trade | Sell two '08 Jan $20 LEAPS @ 2.30 | $450.48 | ||||
| Cash in Hand | 25.58% | $882.21 |
KK |
||||
As of September 2, 2007, OVTI was trading at $20.87. It does not take a great deal of observation to realize the as far as the 'value' of the stock is concerned, it has more than recovered the adjusted cost basis of $17.24. You should also 'see' that if the stock is still trading above $20 in January 2008, the assignment will provide over $500 in additional profit.
Note . . . without the use of the SysCW Dollar Cost Averaging strategy, the value of the stock would still be below the original cost basis. Needless to say, it does take a degree of strategy appreciation (intestinal fortitude) in order to step up to the plate and purchase additional shares of a stock that has lost value.
Your comments, questions and opinions are always welcome. rlcoveru@wavecable.com
PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN OVTI 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 © 2006. All rights reserved.
Revised: 09/02/07