Systematic Covered Writing

... more than just covered calls!

Initial Positions

In order for an investment strategy to be effective it should have two characteristics.  First, it should be simple and second, it must be repeatable.  These principles apply to more than just Systematic Covered Writing.  Truly successful endeavors should be able to be repeated and they should be simplistic in terms of implementation.  Here is how simple the process is for any Initial Position within the Systematic Covered Writing portfolio:

·        Possibility One - The initial strike price is below the trading price on expiration Friday and the stock is assigned.

·        Possibility Two - The initial strike price is above the current trading price on expiration Friday and the option expires.

·        Possibility Three - The initial strike price is close enough to the current trading price that the option can be effectively rolled either Out, or Out & Up.

When you think about it, the same three possibilities occur with any option  that has been sold.  Within the SysCW process, this is where the 'type' of trade comes into play.  For Initial Positions, Continued Trades, and Appreciated Trades, having the underlying stock assigned is simply the logical end to the position.

For any type of Interim Trade it is important to roll the option in order to prevent the option from being exercised. As a subscriber, you can view many examples of this process.  One source would be the many examples, both historic and current which are provided for educational purposes. Another source would be to monitor the online portfolios.  The newest ($400k) portfolio contains a link to individual position documentation.  These pages will be updated each time the writer enters a transaction.  The goal is to provide not only the data, but also the thought process behind the activity. 

 

This example is going to explore a sampling of Initial Positions which were established in various portfolios in 2007. The premise behind this exercise is to illustrate one of the fundamental beliefs of Systematic Covered Writing.  As a subscriber, you will, or have seen this expression often: ... when all is said and done, the research is complete, and the 'perfect' stock is selected, it is important to always be aware that nobody knows.

What we do know is that the price of stock at option expiration is going to have changed in one of five ways.  This same thought process is repeated over and over as the duration of a position continues.  It is simply a matter of selecting the appropriate strategy at the end of the covered cycle. At times this will be allowing assignment, and at other times rolling the option will be appropriate. Knowing what can happen, and what you will do if it does, is the process of Systematic Covered Writing.

 

Systematic Covered Writing

POSITION   FLOW   CHART

 

 

 

 

 

 

 

 

 

Text Box: As expiration approaches, the value of the stock my have increased by up to 20%.

Text Box: Next SysCW Strategy

 

Text Box: As expiration approaches, the value of the stock my have remained about the same.

 

 

Text Box: As expiration approaches, the value of the stock my have decreased by up to 20%

Text Box: Next SysCW Strategy

Text Box: As expiration approaches, the value of the stock my have decreased by more than 20%

Text Box: Next SysCW Strategy

 

 

Text Box: Next SysCW Strategy

 

 

 

Here are some examples for 2007:

CCJ  JADE  WM  VRTX  NEW

For additional Initial Positions, please check out the $400k Portfolio.  The historical data for over 60 Initial Positions is provided within that source.

Text Box: Next SysCW Strategy

Text Box: As expiration approaches, the value of the stock my have increased by more than 20%.

Text Box: The starting point is the sale of a call option, which can be the Initial Call , or any call thereafter. From this point, only five overall changes can happen to the beginning and ending value of the underlying stock.

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SYSTEMATIC COVERED WRITING
Copyright © 2007. All rights reserved.
Revised: 05/28/07