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:

When you first look at the Initial Position Math Exercise below, you will notice a reasonably satisfactory percentage for the downside protection. Having said that, one might be compelled to jump right in, once the return if called is observed! Yes, that really is 82.03% BUT . . . in order to obtain that back to cash return; the stock would have to appreciate above $17.50 by the January expiration. Normally, the calls are written below the trading price to maximize the cash in hand, but in this case . . . there is an ulterior plan.

In this portfolio, the writer also holds shares of ONXX with a higher cost basis and a $20 strike price. The ‘plan’ is as follows:

IF . . . ONXX is trading above $17.50, the writer will allow this call to be exercised, as there will be no problem rolling the $20 position either OUT or OUT & Up
IF . . . ONXX is trading below $17.50, both calls will expire and the positions will be combined. Today’s new position then becomes a Dollar Cost Averaging position, which happens to begin with a 14% cushion (the $231.75 premium).

One of those two events will happen. Regardless, as long as this stock is trading above $13 in January, this will work out to be a ‘good’ position. I guess one could state that as the third possibility . . . if ONXX is trading below $13 on January, then this position would become somewhat of a wasted effort. The covered writer is hedging towards door number one or door number two. We will see in a few months.

Nobody Knows!


The Covered Writer

	Systematic Covered Writing
	… more than just covered calls!
	Initial Position:    The Math Exercise
	Position:	100   ONXX   With   Jan 2007   $17.50   Call
	Stock Symbol			ONXX		Call Symbol			OIQAW
	Stock Purchase Price			$15.430		Call Sold Price			$2.40
	Number of Shares			100		Call Strike Price			$17.50
	Trade Entry Date			22-Sep-06		Expiration M & Y			1	2007
	Net Cash Generated			$231.75		Net Stock Investment			$1,549.99
	Net Return if Called			$414.76		Annualized  if Called (1)			82.08%		(A)
	Cash Required for Trade					$1,318.24
	Percentage Recovered w/Option *					14.95%	(B)
Days Until Expiration & Expire Date						119		19-Jan-07
	* 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 CELG 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: 12/09/06