Systematic Covered Writing

...More than just covered calls . . .

Recover After Expiration - The Math Exercise

This SysCW Recover after Expiration  example 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. Recovering occurs each time an option expires, even when a stock loses value.  This is a key philosophy of the Systematic Covered Writing process.  Writers will profit from stocks that appreciate, and they will also generate addition cash with the stocks that lose value.

The position is not over until it's over!

The Actual Email Comments:

This ELN position was established a little over one year ago. The investor that has to be right about the stock direction would be looking at a 11.7% loser at the present value. The covered writer is looking at a position that including today’s Recover After Expiration has generated 44.60% of the net total investment. AND . . . at the current cash generation rate, the position will generate of 16% during the coming year. This is in spite of the ‘value’ of the underlying stock.

CAUTION: Please note the forever caution that the shorter the duration of the active call option, the more repeating the same transaction over the course of a year comes into play. We will watch the effect of this caution as the year progresses.

The Covered Writer

ADDITIONAL COMMENTS: The cash generation rate is calculated by taking the current premium and multiplying the amount by the hypothetical number times in could be repeated in a year. In this case that would be six times $41.74 or $250.44.  Then divide this extrapolated figure by the investment of $1,525.00 to arrive at the cash generation rate of the investment.  What this tells you is that even though the stock's value is depressed, the net investment is still generating cash at 16.42% per year.

The assumption is that the same premium could be generated six times . . . or the average premium generated equates to six times $41.74.  The writer is being paid to own this stock position, which the primary focus of SysCW.

 

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
    SysCW   Position Tracker    
               
Historical Data Open Position  
        Stock Cash Total Cash Value as of
Date Strategy Status Position Investment Generated Generated 2-Feb-07
31-Jan-06 Initial Stock Purchase Buy 100 ELN @ 15.18 (1,525.00)      $     1,348.00
  Current Price $13.48 Elan Corporation, plc (ADR)        
31-Jan-06 Initial LEAP Option  Sell Jul $15 call @ 3.90 Expired 7/22/06 $381.73    
2-Aug-06 Continued Trade Sell Jan $15 call @ 2.65 Expired 1/20/07 $256.74    
2-Feb-07 New Continued Trade Sell Mar $ $15 call @ .50   $41.74    
               
  Cash in Hand 44.60%       $680.21

 TS

Questions?   rlcoveru@cox.net

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 suggesting 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 provide for 'educational purposes' for the sole purpose of illustrating the Systematic Covered Writing strategies.

Thank you!

SYSTEMATIC COVERED WRITING
Copyright © 2005. All rights reserved.
Revised: 02/23/11