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.

It could be said that the first group amounts to examples of  'the labor', and the second group are illustrations of 'the fruit' of that labor.

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Dollar Cost Averaging Example

THE DATE: August 11   , 2006

THE STOCK: Rambus Inc. (RMBS) creates a range of chip interface technologies that improve the time-to-market, performance, and cost-effectiveness of customers' semiconductor and system products.

EXAMPLE TYPE:  Fruit!  This is a continuation of a position where the Dollar Cost Averaging strategy has been used at some point in that past.  The  strategy most recently was the Buy Back & Roll Out & Up.

COMMENTARY: The discussion begins with the historical data as maintained in the Position Tracker.  This data includes the Buy Back & Roll Out transactions which were executed in August 2006, as well as more recent activity.

As you can see as of December 1, 2006 this position has a lot going for it.  The Dollar Cost Averaging purchase was entered at the same time the strike price was lowered.  By purchasing additional shares, the writer was able to bring the cost basis of the position from $34.31 down to a net of $22.54, and with the stock trading at $21.61, the 'stock' is close to being 'even'. 

As RMBS began to appreciate above the Interim $15 strike price, the writer used the Buy Back & Roll Out & Up strategy to keep the stock from being called in January 2007.  There is always the question of why roll it in September, when the call does not expirer until January?  A good question, as there is no 'right' or 'wrong' time, so long as it is done before the call is exercised.

The writer tends to base the decision on the resulting math.  In this case . . . the stock is protected, and cash in excess of 36% has been generated.  Given that during the holding period, the stock lost two thirds of it's value, the writer is satisfied with the results so far.  Note the different strategies used on this one position:

1. Initial Position
2. Buy Back & Lower
3. Dollar Cost Averaging
4. Buy Back & Roll Out & Up

Now that the 2008 LEAP has been sold, the position is more or less in a holding pattern unless the price changes dramatically one way or the other.

THE POINT: Rather than taking a loss and 'hoping' the next pick would be a winner, the SysCW approach is to accept the winners, and work on the others until the position ends with a profit.  Will this profit be as high as the 'winners'?  Possibly not, but if the number of positions that end at a loss are 'next to none' . . . there is nothing to make up.

Please feel free to enter into a detailed discussion . . . rlcoveru@wavecable.com

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN RMBS 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 © 2005. All rights reserved.
Revised: 02/05/07