THE EXAMPLE DATE :    January 17, 2007

THE STOCK:    Microsoft Corporation (MSFT) - a DOW component, you probably have heard of them.

THE STRATEGY:  Buy Back & Roll Out & Up (BB&RO&Up)

THE THEORY: If a call option is written, it can be closed, and if it is closed, it can be replaced with a higher strike priced option on the same day. Given that this scenario is the case more often than not, strike prices can be used that are below the cost basis of the stock.

THE COMMENTARY:  The hardest choice for using this example was where to place it on this Web site. The latest transactions involved the use of the BB&RO&Up strategy of SysCW, so that could be a reasonable section to list it under.  The stock pays dividends, so Dividend Positions would have been reasonable. The stock has been in this portfolio since January 2002, so maybe it should be with long-term holdings.  AND . . . this is a stock that lost significant value during the holding period, which is why it is here!

Investors following the SysCW methodology are supposed to be long-term investors as this is one of the basic principles or philosophies of Systematic Covered Writing. Almost every detailed example distributed to subscribers mentions this fact under the page heading where it is written:  "Systematic Covered Writing is a series of strategies for long-term investors ...". Please note that long-term is not weeks or months, but years!

Note the purchase price of MSFT in 2002 ($69.28).  Taking into account the two-for-one split, this holding is now 200 shares at $34.14 (ignoring commissions). What you may not know, is that during the holding period, MSFT traded as low as $19.62 on September 30, 2002 (split adjusted).  Folks . . . that is a loss in value of over 42%.  Yes, the writer could have sold the stock, and yes, there may be 'better' stocks than MSFT for generating cash, but would they serve the same purpose?  Keep in mind that if you sell a position at a 40% loss that now has created a positive 40%, then the position you started from scratch would have to gain 80% just to be in the same place.

MSFT was selected for this portfolio, not because the writer knew what would happen, and not because it was the best stock to write calls against, but rather because of the 'blue chip' stature of the Company.  MSFT will probably be around for many years in the future.  Remember, part of the philosophy of SysCW is diversification, which when all is said and done, is exactly why this stock was selected.

Up until the last few weeks, it looked like the $30 strike price was going to work out just fine.  With the stock now trading at $31.16, the writer does not want this stock assigned. That was one issue.  The other concern was that MSFT was going to continue to appreciate, and a $30 strike price was not acceptable because of the cost basis.  For that reason, the position was rolled out to 2009. The strike price was increased without 'giving back' cash that had already been generated.

With the new strike price very close to the net cost basis of $35.17 per share, it would be 'okay' if the option were to be exercised.  That was written, because it is true . . . it would be okay.  BUT . . . the writer will not allow that to happen. How can those words be written?  Because the writer has a plan.  If MSFT moves above $35 a share, there is nothing to stop the writer from using the Combo Buy Back & Roll Out & Up to maintain the position.

Note that someone currently has the 'right' to buy the stock for $35 . . . but history tells us that the odds of the stock being assigned early are extremely small. So . . . one can be all concerned about what 'could' happen, or they can focus on what will happen 99.99% of the time.

THE POINT:  The point is just because a stock loses value does not mean one should change the purpose of a position. Value will be value . . . we cannot control it, nor should we try.  Focus on generating money with your money, and you should do just fine as long as you are a long-term investor.

The Covered Writer    webmaster@syscw.com

 Systematic Covered Writing . . . . more than just covered calls!

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

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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: 02/05/07