AGIX Initial Position

Systematic Covered Writing

... more than just covered calls!

Initial Position - The Math Exercise

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:

If you take a look at the $100k Portfolio you will notice that a TDS position was established and executed on 200 of the 300 shares of AGIX. Today’s new position is aimed at creating a loss against the remaining 100 shares.

Now . . .the writer could not use the June expiration because it is less than 30 days away. This led the writer to the July expiration. Notice that this is actually a pretty nice Initial Position as far as the math goes. The writer decided to purchase 200 shares instead of 100 to reduce the effect of commissions. Yes, the math (percentages) look good, but please realize two points:

First, the duration is short. When annualizing a short-term position, always remember that the transaction would need to be repeated a number of times in a row in order to actually obtain the return.

Yes, 42.02% ‘looks’ exciting, but because of the size of the investment … this position is only going to generate $36.52 if assigned, which is nothing to write home about!

Now . . . if someone had a strong believe that the bad news was out on AGIX, and felt that the stock would be above $2.50 in July . . . do the math on a 1000 share position. You would notice that the downside protection on a $2700 investment would be over 19%, and IF assigned, the back-to-cash return when annualized would be over 71%, which just may be something worth writing home about!

The Covered Writer
Additional Comments: There is a lot of activity with this option, but I'll bet my socks the bulk of the transactions are option traders trying for an inexpensive position.


	Systematic Covered Writing
	… more than just covered calls!


	Initial Position: The Math Exercise
	Position:	200 AGIX With Jul 2007 $2.50 Call

	AtheroGenics, Inc.				AGIX Jul 2007 2.5000 call

	Stock Symbol			AGIX		Call Symbol			.AUBGZ

	Stock Purchase Price			$2.700		Call Sold Price			$0.55

	Number of Shares			200		Call Strike Price			2.500

	Trade Entry Date			23-May-07		Expiration M & Y			7	2007

	Net Cash Generated			$100.50		Net Stock Investment			$546.98

	Net Return if Called			$36.52		Annualized if Called (1)			42.02%		(A)

	Cash Required for Trade					$446.48

	Percentage Recovered w/Option *					18.37%	(B)

Days Until Expiration & Expire Date						58		20-Jul-07

											Kids

* The net cash generated divided by the net cash invested. This is the 'downside protection'. This is not a profit percentage. It could be called the 'Stock Ownership Risk Reduction Percentage'.
(1) The Annualized percentage rate is calculated by dividing the Net Return if Called by the Net Stock Investment and expressing the result as a percentage. This is the return for the period. Now divide this percentage by the duration of the trade in days and multiply the result by 365 to 'annualize the return'. It is important to realized that an assumption is being made that the same (or similar) transactions could be executed over the course of a year. There is no guarantee that this could be accomplished. Also note that the shorter the duration of the position, the more significant this caution becomes.
Comment: The guidelines for establishing an Initial Position using Systematic Covered Writing, requires a minimum potential back to cash return percentage (A), if the option is exercised, coupled with a minimum percentage (B) of the original investment generated by selling the call option. It is up to the writer to decide what these percentages should be. The SysCW recommendation is for both of them to be at least 15%. Remember this is a guideline not a hard fast rule. For diversification purposes, there may be times when it is necessary to hedge a little.

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: 05/25/07