Systematic Covered Writing

... more than just covered calls!

Initial Position - The Math Exercise

NOTE: The detailed information can be found below the email information that was sent to subscribers on November 09, 2006.

This SysCW Initial Position was emailed to subscribers on the day the transactions were executed.  In order to know what to do in the future, it is important to understand what we did in the past.

Email Comments:

It’s the math! With the cash from the ICOS position . . . and some margin . . . the writer established this 71 day position in the 100k Portfolio.

Have a GREAT day!


The Covered Writer

       
  Systematic Covered Writing
  … more than just covered calls!
                       
                     
  Initial Position:    The Math Exercise  
  Position: 500   AGIX   With   Jan 2007   $12.50   Call
                       
  Stock Symbol   AGIX   Call Symbol     AUBAV  
                       
  Stock Purchase Price $13.430   Call Sold Price   $3.40  
                       
  Number of Shares   500   Call Strike Price   $12.50  
                       
  Trade Entry Date   9-Nov-06   Expiration M & Y   1 2007  
                       
  Net Cash Generated $1,686.75   Net Stock Investment $6,722.00  
                       
  Net Return if Called $1,197.75   Annualized  if Called (1) 91.60%   (A)
                       
  Cash Required for Trade    $5,035.25          
                       
  Percentage Recovered w/Option * 25.09%   (B)        
                       
Days Until Expiration & Expire Date   71   19-Jan-07  
                       

The Math Exercise above has been corrected in that the stock symbol was originally sent out as CYBX, not AGIX.  (Stuff happens.)  Five-hundred shares of AGIX stock was purchased, and five contracts of the Jan $12.50 call were sold to establish this position in the 100k Portfolio.    So . . . can the question be . . . why?

Commentary: The portfolio already has a 300-share position of AGIX as indicated by the Position Tracker data below:

      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 9-Nov-06
22-Dec-05 Initial Stock Purchase Buy 300 AGIX @ 19.599 ($5,886.70) TDS Used on 200 $4,029.00
  Current Price $13.43 AtheroGenics, Inc.        
22-Dec-05 Initial Call Option Sell three '07 Jan $17.50 @ 10.10   $3,019.12    
22-Dec-05     Accounting ($18.00) ($14.12)    
  Cash in Hand 51.05%       $3,005.00  

Notice that for the new position the strike price is below the $13.43 current trading price.  As we know . . . the price of the stock in January will either be higher than it is today, the same as it is today, or lower than it is today.  How much one way or the other . . . nobody knows.  But . . . in looking at a one year chart (as of today) of AGIX as presented below, it would seem that the odds of the stock being above $12.50 are 'reasonable'.

 

The 'plan' is as follow:

♦ If AGIX is trading above $17.50 significantly, the writer will allow all options to be assigned.
♦ If AGIX is trading below $17.50, but above $12.50  the writer will allow the Jan $17.50 calls to expire and may or may not roll the $12.50 position depending on the math at the time.
♦ If AGIX is trading just slightly above $12.50, which would be below $17.50, the writer will roll the $12.50 options to $15 using the Buy Back & Roll Out & Up strategy, and then sell 3 additional contracts on the Monday after expiration.  In other words, this would become a very profitable Dollar Cost Averaging position.
♦ If AGIX is trading below $12.50, the writer will recover the combined position with a $15 LEAP position.

One of the scenarios listed above should take place.  The reason the writer established this overweight position is because of the combination of the downside protection and the back to cash gain if the $12.50 call are exercised.  Both positions as maintained in the Position Tracker follow:

    SysCW   Position Tracker    
               
Historical Data Open Positions  
        Stock Cash Total Cash  Value as of 
Date Strategy Status Position Investment Generated Generated 9-Nov-06
22-Dec-05 Initial Stock Purchase Buy 300 AGIX @ 19.599 ($5,886.70) TDS Used on 200 $4,029.00
  Current Price $13.43 AtheroGenics, Inc.        
22-Dec-05 Initial Call Option Sell three '07 Jan $17.50 @ 10.10   $3,019.12    
               
  Cash in Hand 51.29%       $3,019.12  
9-Nov-06 Initial Stock Purchase Buy 500 AGIX @ 13.43 ($6,722.00)     $6,715.00
  Current Price $13.43 AtheroGenics, Inc.        
9-Nov-06 Initial Call Option Sell five Jan $12.50 calls @ 3.40   $1,686.69    
               
  Cash in Hand 25.09%       $1,686.69  

Look at the new position.  If the Jan $12.50 calls are exercised the proceeds from the sale will amount to $6,233.00 The net result of this new position would then be:

Proceeds - Cost Basis + Call Premium = Cash Gain = Profit

$6,233.00 - $6,722.00 + $1,686.69 = S1,197.69

This plausible outcome coupled with the price history for the past year, and the possibility of Dollar Cost Averaging are all reasons for establishing this new AGIX position.

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN AGIX 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: 02/05/07