Systematic Covered Writing

...More than just covered calls . . .

Recover After Expiration - The Math Exercise

This SysCW Recover after Expiration example is intended to illustrate this strategy being used on a stock that during the holding period lost significant value, yet as of July 2007, the stock is only $5 below the purchase price. The recover strategy is used each time an option expires worthless, which basically means the writer maintains ownership of the underlying stock as well as the cash that someone lost when they purchased the call option. In order to know what to do in the future, it is important to understand what we did in the past.  This is a key strategy used in the Systematic Covered Writing process.  Writers will profit from stocks that appreciate, and they will also generate additional cash with the stocks that lose value or fail to reach a given strike price by expiration.

Keep in mind that a position is not over . . . until it's over!

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ESIO - Electric Scientific Industries, Inc.

STRATEGY COMMENTS:  Notice that the latest strike price is now back to the original $25 strike.  It's taken since 2002 to accomplish this, but that's okay with the writer. We are after all, long-term investors.

PERSPECTIVE - Many professional money managers compare their activities to changes in the market as a whole.  For example, they may compare how their holdings are performing against a major index like the DOW.  Let's do that . . . just for kicks and giggles.  Keep in mind that the SysCW perspective is on an investment generating new cash as opposed to an investment increasing in value in order to generate new cash. Check this out:

Description	Date	Value
Dow Jones Industrial Average (DOW)	January 22, 2002	9,713.80
Dow Jones Industrial Average (DOW)	July 16, 2007	13,974.48
Change in Value		4,260.68
Percentage Gain in Value		30.49%

Please note that the current value of the DOW was captured during market hours . . . Odds are, it will be different when the market closed today.

Notice that during the past five and a half YEARS, the DOW has gained a total of 30.49%.  Note this is not per year, but in total.  This means that if your investments were tied to the DOW average . . . you would have gained about 5.5% a year. Exciting huh?

Now go back the the historical example of a SysCW position that still is not worth the purchase price.  The investment, which has been a constant over the same time frame, has generated $3,379.42 in new cash. This amounts to a gain of 57.09%, again over the same time period as the DOW gained 30.49%.

Of course there will be those that say the stock is in a losing position if it were to be sold . . . they are correct . . . BUT . . . one of the guidelines of Systematic Covered Writing is that writers are long-term investors. Having said that . . . let me ask you this:  Do you not think this position will beat the socks off the gain in the DOW when the stock has appreciated back to its original basis? Hope you see that the position is 20% ahead of the game at this point in time.

It's all a matter of perspective and having a mindset that encourages looking at the positive aspects of the process, rather than worrying about things that cannot be controlled. Remember, positions are either Closed, or not finished yet (Open).

Comments and or questions are always welcome.   rlcoveru@cox.net

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