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.

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WM - Dollar Cost Averaging Example

THE DATE: December 3, 2007

THE STOCK: Washington Mutual (WM) is a consumer and small business banking company with operations in United States markets.

EXAMPLE TYPE:  This is an example of the Dollar Cost Averaging strategy of SysCW. The rational behind this strategy is based on the fact that the stock will reach the lower 'averaged' price before is reaches the pre-averaged price. This is a somewhat obvious statement, and in a way it is an admission that at some point, the value of the underlying stock is important.

COMMENTARY:  Two months ago this Company was rated a HOLD by the analysis's.  At that time the stock was trading in the low $40 range.  Amazing, now that the stock is down below $20, the rating has been changed to a Moderate Sell.  (A little late to the party in my opinion.)

Today's example begins with a 'WaMu' position that began on January 8,2007. Part of the rational behind entering this position back in January was the fact that WM pays a dividend. The idea is/was that the addition of the quarterly dividends to the call premiums would create a cash generating position that fit the cash per year guideline of SysCW. Please note that just because the price declined, does not mean this won't still happen.

A covered writer using the SysCW thought process understands that stocks can lose value. In a retirement account, the strategy used when this happens is to Dollar Cost Average the position.  Normally, one would wait for an existing call to expire, thus saving the cost of closing an active option, but in this case, the decision was to go ahead and do it early.  This was relative painless, as the cost to close the Jan $45 call was only $13.25.

There is an assumption with the overall thought process with this position.  The thinking is that WM will not reduce their dividend. If you look at the Cash in Hand percentage, you will see that it is 12.24%.  It is significant to understand that this includes the cost of the shares that were just purchased. Now add in say $400 in dividends over the next year. We would then have a position that generated close to 20%.  This is quite acceptable for a major bank holding. 

It is possible that in January, assuming WM is appreciating, that an additional 100 shares would be purchased, and added to the mix.  This would all depend on the Company's ability to maintain the dividend payout. For now, a 200 share position seems quite reasonable.  The Dollar Cost Averaging strategy is basically the same as taking advantage of a SALE.

Please direct comments or questions to rlcoveru@eavecable.com.

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN WM 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 © 2007. All rights reserved.
Revised: 12/05/07