Systematic Covered Writing

... more than just covered calls!

Dollar Cost Averaging Example

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Dollar Cost Averaging is an important Systematic Covered Writing strategy. The strategy gives the writer something to do rather than the 'stop loss' approach of just giving up.  Stocks may lose significant value during the holding period, but this strategy allows writers to cope with an ever changing market place.  As mentioned, some would say to just dump the losers and move on.  Many actually follow that philosophy. The covered writer believes there are two specific 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 yet 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.

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RMBS    Rambus Inc.

POSITION UPDATE: November 11, 2006

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

STRATEGY TYPE:  This example involves a position where the Dollar Cost Averaging strategy was combined with lowering the existing strike price. Keep in mind that the 'averaging' can be used going up or going down.

COMMENTARY: The discussion begins with the historical data as maintained in the Position Tracker.  This data ends with the combination transactions which took place in July.

Needless to say, RMBS took a serious dive since it was purchased in April.  It seems redundant to point out that typical 'investors' would be thinking they made a mistake by entering this position.  Again . . . this thought process is brought on by either a lack of experience or a lack of knowledge of the Systematic Covered Writing approach. This is the ultimate reason for providing real historical examples.  The process does work . . . if you simply work the process.

 This specific holding happens to be in the 100k Portfolio, so it's not like the data has not been available. Here are a few ideas to consider, based on the data above . . .

•    The Dollar Cost Averaging resulted in reducing the stock break even value to $29.03 from $41.84.
•    The position has been in place for seven months (as of November 2006), and has already generated over 26% of the total investment.
•    The stock has appreciated since the second purchase.

Always remember when using the Dollar Cost Averaging strategy that the strike price of the option being sold must be above the purchase price of the new shares of stock.  Also . . . there is an ongoing plan . . . notice the price of the stock is now back above $20.  If it reaches $25 before the January expiration, the writer will simply use the Buy Back & Roll Out & Up strategy to protect the holding.  Can that happen?  Sure.  Will it?  Nobody knows.  The key to SysCW is in the knowledge that there is a strategy to use once whatever does happen, ends up happening.

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'?  Yes, no, maybe so.  The important issue is the fact that if the number of positions ending with a loss are next to none . . . then there is nothing to 'make up'.

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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