Systematic Covered Writing

 . . . more than just covered calls . . .

AGIX and Option Switching

Example Index       The Strategy

THE DATE: June 30, 2006 (Transactions took place today!)

THE STOCK:  AGIX -- Many AGIX positions were established at the beginning of this year due to the unusual premiums for the January 2007 calls (they were LEAPS earlier this year.  Numerous follow-up examples have been provided and this one is no exception. 

THE STRATEGY: Option Switching

THE COMMENTARY: Notice that the writer did not embellish on the strategy name as this is a very unusual strategy.  It is one for you to have in your strategy box, just in case a situation arises where you can use it.  Here we go . . .

With most SysCW historical examples, the information will begin with the Position Tracker data prior to the most recent transactions. In this case, several independent AGIX positions exist in the same portfolio as follows:

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Open Position  
        Stock Cash Total Cash  Value as 0f 
Date Strategy Status Position Investment Generated Generated 30-Jun-06
28-Dec-05 Initial Stock Purchase Buy 300 AGIX @ 20.0699 ($6,027.97)     $3,942.00
  Current Price $13.14 AtheroGenics, Inc.        
28-Dec-05 Initial Call Option Sell three '07 Jan $20 LEAPS @ 10.20   $3,049.12    
             
  Cash in Hand 50.58%       $3,049.12  
17-Jan-06 Initial Stock Purchase Buy 100 AGIX @ 19.0699 ($1,913.99)     $1,314.00
  Current Price $13.14 AtheroGenics, Inc.        
17-Jan-06 Initial Call Option Sell '07 Jan $15 LEAP @ 10.40   $1,031.75    
               
  Cash in Hand 53.91%       $1,031.75  
3-Apr-06 Initial Stock Purchase Buy 200 AGIX 16.16 ($3,239.00)     $2,628.00
  Current Price $13.14 AtheroGenics, Inc.        
3-Apr-06 Initial Call Option Sell two '07 Jan $15 LEAPS @ 6.90   $1,370.45    
               
  Cash in Hand 42.31%       $1,370.45  

The reader can see that there are three positions with a total of 600 shares.  The question becomes what can we do with this position?  One thought was to use the Buy Back & Lower strategy on the first position listed.  The idea would be to lower the strike price from $20 to $17.50 or $15.

Another thought would be to liquidate one or more of the positions and move the capital to other positions.  There would be two reasons why a covered writer would consider this:

  1. AGIX represents an overweight position in the portfolio.  This was allowed because of the phenomenal premiums.  Note that two of the positions provided in excess of 50% downside protection! Reducing the position now that a good portion of the extrinsic value has eroded and investing the funds in other positions would reduce the overweight position.

  2. The price of AGIX seems to be 'stuck' below $15 for a while.  Of course the best way for that not to be the case is for me to mention it!

GET CREATIVE: In considering this it dawned on the covered writer to just combine the two thoughts. All the writer needed to do was switch which option positions went with each stock position.  There are 300 shares with a $20 option and 300 shares with $15 options.  If the idea is to reduce the position by 50% and maximize the cash that would become available, and have the closed position end with a PHENOMENAL back to cash gain . . . all the writer needed to do was a little switching!

It is important to note that the covered writer actually went through this exact process prior to entering the transactions you will see in a moment.  Here is how the data above looked once the option locations were 'switched' . . . understand that the stock does not 'know' which option it is covering . . . this is nothing more than adjusting journal entries.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Open Position  
        Stock Cash Total Cash  Value as 0f 
Date Strategy Status Position Investment Generated Generated 30-Jun-06
28-Dec-05 Initial Stock Purchase Buy 300 AGIX @ 20.0699 ($6,027.97)     $3,942.00
  Current Price $13.14 AtheroGenics, Inc.        
17-Jan-06 Initial Call Option (Switched) Sell '07 Jan $15 LEAP @ 10.40   $1,031.75    
3-Apr-06 Initial Call Option (Switched) Sell two '07 Jan $15 LEAPS @ 6.90   $1,370.45    
               
  Cash in Hand 39.85%       $2,402.20  
17-Jan-06 Initial Stock Purchase Buy 100 AGIX @ 19.0699 ($1,913.99)     $1,314.00
  Current Price $13.14 AtheroGenics, Inc.        
3-Apr-06 Initial Stock Purchase Buy 200 AGIX 16.16 ($3,239.00)     $2,628.00
28-Dec-05 Initial Call Option (Switched) Sell three '07 Jan $20 LEAPS @ 10.20   $3,049.12    
               
  Cash in Hand 94.14%       $3,049.12  

There was no 'typing' here . . just cut and paste and deletes.  The three contracts of the $20 option were moved to the last entry.  Rows were added to the first entry.  Both $15 strike price contracts were moved to match up with the 300 lot purchase.  It does not matter that there were two separate sales . . they represent 300 shares and they are matched up with 300 shares.

Next, the extraneous rows were deleted from the bottom two positions and they were merged into one position of 300 shares.  Here is one way to look at this.  All of the amounts in the Stock Investment column and the Cash Generated column are still the same.  They still add up to the same amount.  Instead of three positions there are two. Also note the (Switched) addition to the strategy notation. This is to remind the writer of what took place when looking at these positions in the future. Keep in mind that the writer keeps all of the data indefinitely. 

Next the writer 'did the math'!  What would happen if the bottom position was closed?  What would the result be?  This is a simple process. One simply looks up the current Ask price for the Jan $20 calls (they used to be LEAPS) and the current price of the stock.  You then just do the math.  Calculate what it cost to close the option and calculate the proceeds from selling the stock.  You could use the Close it or Wait Math Exercise template, or just plug the numbers 'manually' into the Tracker.

Once the covered writer entered the data . . . the decision was 'easy'.  The results are listed next.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
      SysCW   Position Tracker        
               
Historical Data Closed Position  
        Stock Cash Total Cash  
Date Strategy Status Position Investment Generated Generated Annualized
17-Jan-06 Initial Stock Purchase Buy 100 AGIX @ 19.0699 ($1,913.99)      
      AtheroGenics, Inc.        
3-Apr-06 Initial Stock Purchase Buy 200 AGIX 16.16 ($3,239.00)      
28-Dec-05 Switched Option Sell three '07 Jan $20 LEAPS @ 10.20 Closed 6/30/06 $3,049.12    
30-Jun-06 Buy Calls to Close Option Buy three Jan $20 calls @ 1.75   (-$535.75)    
30-Jun-06 Sell Stock to Close Position Sell 300 AGIX @ 13.0901 $3,919.90 ($1,233.09)    
30-Jun-06     Net Cash Gain     $1,280.28 Annualized
164 Days   Net Percentage Gain     24.85% 55.30%
Historical Data Open Position  
        Stock Cash Total Cash  Value as 0f 
Date Strategy Status Position Investment Generated Generated 30-Jun-06
28-Dec-05 Initial Stock Purchase Buy 300 AGIX @ 20.0699 ($6,027.97)     $3,942.00
  Current Price $13.14 AtheroGenics, Inc.        
17-Jan-06 Initial Call Option (Switched) Sell '07 Jan $15 LEAP @ 10.40   $1,031.75    
3-Apr-06 Initial Call Option (Switched) Sell two '07 Jan $15 LEAPS @ 6.90   $1,370.45    
               
  Cash in Hand 39.85%       $2,402.20  

The closed position ended with a very acceptable gain!  Remember . . . this is a stock that is trading about $6 below the purchase price!  Once again  . . . the reason subscribers saw so many "Initial Positions" established with AGIX in December and January was because the premiums were extraordinary.  This was pointed out at that time, so the results of this activity should come as 'no surprise'.  Okay . . . enough bragging!

The writer is 'fine' with the closed position.  But what about the open one which now has the $15 strike price?  This is just rough . . . but think about it  for a moment.  This position has now generated about $2400.  There is about a $5 difference per share between the $15 strike price and the purchase price.  If the option were to be exercised, there would be a $1500 loss created in selling the stock, but this would be offset by the $2400 generated with the options.  IF exercised . . the active position would still end up with a  back to cash profit of about $900.

In other words . . .'nothing bad would happen'!   The closed position is closed . . the profit is the profit.  The capital has been reinvested in other positions that were sent to subscribers on June 30, 2006.  Now it's just a matter of how this active AGIX position is traded over the coming months.  Is the writer concerned that the stock is trading at $13.14?    NOPE!

Comments, questions and opinions are always welcome . . . rlcoveru@wavecable.com

The Covered Writer

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN AGIX 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! STRATEGIES INVOLVING TAX ISSUES SHOULD BE DISCUSSED WITH YOU TAX PROFESSIONAL.

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