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:

This portfolio contains an ELN position with a Jun $15 call.  With the stock trading above $18, the writer is figuring this older holding is ‘going away’.  With this in mind the writer elected to establish a replacement position today.  Needless to say . . .the math works!

The Covered Writer

Additional Comments:  Notice that even though ELN has appreciated nicely over the past few days, the writer still opts for the downside protection by selling the strike price below the purchase price of the stock.

       
  Systematic Covered Writing
  … more than just covered calls!
                       
                     
  Initial Position:    The Math Exercise  
  Position: 100   ELN   With   Jan 2008   $17.50   LEAP
                       
  Elan Corporation, plc (ADR) ELN Jan 2008 17.5000 call      
                       
  Stock Symbol     ELN   Call Symbol     .ELNAW  
                       
  Stock Purchase Price $18.910   Call Sold Price   $3.90  
                       
  Number of Shares   100   Call Strike Price   17.500  
                       
  Trade Entry Date   22-May-07   Expiration M & Y   1 2008  
                       
  Net Cash Generated   $381.75   Net Stock Investment   $1,898.00  
                       
  Net Return if Called   $216.75   Annualized  if Called (1) 17.30%   (A)
                       
  Cash Required for Trade    $1,516.25          
                       
  Percentage Recovered w/Option * 20.11%   (B)        
                       
Days Until Expiration & Expire Date   241   18-Jan-08

 SB

* 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.

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN ELN 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