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.
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.
Dollar Cost Averaging Example
THE DATE: July 24, 2006
THE STOCK: Yahoo! Inc. (YHOO) is one of the world's largest providers of online content and services.
EXAMPLE TYPE: Labor! The latest transaction for this holding involved the use of the Dollar Cost Averaging Strategy ($CA).
COMMENTARY: The discussion begins with the historical data as maintained in the Position Tracker. This data includes the use of the Recover After Expiration strategy as well as $CA.
| Systematic Covered Writing | |||||||
| . . . More than just covered calls . . . | |||||||
| SysCW Position Tracker | |||||||
| Historical Data | Open Positions | ||||||
| Stock | Cash | Total Cash | Value as of | ||||
| Date | Strategy | Status | Position | Investment | Generated | Generated | 10-Nov-06 |
| 8-Jun-05 | Initial Stock Purchase | Buy 200 YHOO @ 36.659 | ($7,338.80) | $5,456.00 | |||
| Current Price | $27.28 | Yahoo! Inc. | |||||
| 8-Jun-05 | Initial Call Option | Sell two Jan $35 calls @ 4.60 | Expired 1/21/06 | $910.46 | |||
| 23-Jan-06 | Continued Trade | Sell two Jul $35 calls @ 3.10 | Expired 7/22/06 | $610.48 | |||
| 24-Jul-06 | Dollar Cost Averaging | Buy 100 YHOO @ 25.99 | ($2,607.00) | $2,728.00 | |||
| 24-Jul-06 | $9,945.80 | 300 @ 33.15 | Combined 300 Share Position | ||||
| 24-Jul-06 | Interim Trade | Sell three Jan $30 calls @ 1.30 | $378.23 | ||||
| Cash in Hand | 19.10% | $1,899.17 | |||||
This is the typical use of the averaging strategy as the additional shares were purchased after an expiration. Notice the averaging effect was reduced because only 100 shares were purchased at the lower price. As of November 11, 2006, the market price of YHOO has increased, but it is still below the Jan $30 strike price.
As it looks today . . . the current option will expire and the position will be recovered. The prices will change between now and then, but . . . if the stock was uncovered today, three '08 Jan $30 LEAPS could be sold for $3.30 a share. So . . . let's say that in January, the current option expires and the holding brings in an addition $900 . . . could be more . . . could be less.
There are many possibilities . . . think of this . . . what if YHOO is close to $30 in January, but the calls expire. The writer could sell two contracts of a '08 Jan $35 LEAP, and sell 100 shares of the stock! Keep in mind that there is nothing that says a writer can't reduce the number of shares. Hope you can 'see' from the data that 100 shares were purchased for $2607 . . . generated 1/3 of the $378.23 premium, and would be sold for $2,993.00 . . . If you do the math, you would find that the back to cash gain from the July purchase would be $512.08 against an investment of $2607.00.
Please note that there are significant 'IFS' to that scenario, but 'could' it happen? The reason for mentioning it is the writer has used this approach in the past.
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'? No. But if the number of positions that end at a loss are next to none . . . there is nothing to make up.
________Update February 2007______
The process continues . . . click UPDATE to continue.
PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN YHOO 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: 02/14/07