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.

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Email Comments:

This portfolio did not contain a DNDN position.  The stock dropped in value from the $5.50 range down to the mid $3 range.  So, the writer is thinking the ‘news’ is already out, and now the stock will consolidate or possibly begin to appreciate again.  With this in mind, what if some one was willing to put up almost half the money needed to establish a position that could eventually end with a back to cash gain in excess of 17%? 

Once the writer did the math … the position was established.

The Covered Writer

Additional Comments: DNDN closed at $4.47 on March 23, so it is looking like the writer picked a good entry point for this stock.  On the other hand, given that the strike price is at $2.50, it really doesn't matter what the stock does, so long as it is above $2.50 in January 2008.

The compelling reason for this position was the fact that 48.84% of the investment was returned with the sale of the call. Yes, the writer will 'give back' $634 when the option is exercised, but even so, the investment will generate cash at close to 18% when annualized. 

Note that the writer purchased 500 shares.  The normal Initial Position is 100 shares.  Obviously, the price of the stock influenced the number of shares in that the total investment is only $1867.00.  DNDN has been close to the top of the Current List for a number of weeks, which is what brought looking at this stock to the writer's attention.

 

	Systematic Covered Writing
	… more than just covered calls!
	Initial Position:    The Math Exercise
	Position:	500   DNDN   With   Jan 2008   $2.50   LEAP
	Dendreon Corporation				DNDN Jan 2008 2.5000 call
	Stock Symbol			DNDN		Call Symbol			.WTKAZ
	Stock Purchase Price			$3.720		Call Sold Price			$1.85
	Number of Shares			500		Call Strike Price			2.500
	Trade Entry Date			22-Mar-07		Expiration M & Y			1	2008
	Net Cash Generated			$911.75		Net Stock Investment			$1,867.00
	Net Return if Called			$277.75		Annualized  if Called (1)			17.98%		(A)
	Cash Required for Trade					$955.25
	Percentage Recovered w/Option *					48.84%	(B)
Days Until Expiration & Expire Date						302		18-Jan-08			DN

* 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 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!

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: 03/24/07