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!
Email Comments:
... this position has now generated over 45% of the funds invested in this stock in April of 2004. The stock was recovered this morning and the $441.73 was added to the portfolio. Today, the stock is trading at $43.59. During 2006, the stock has traded above $53 and below $39 a share . . . if the writer was a ‘value’ watcher then this ... [could have been] be a problem. But, being as the writer understands that the 'value' will be the value ... regardless ... the focus is {switched to] ... being paid to own this stock.
This position is one piece of the puzzle that would provide a long term annual cash generation in excess of 10% per year. This is in spite of the fact that as of today, the stock is not worth the amount invested in it. If KLAC had been closer to $50 today, the writer could have either written the same call (with a higher premium), or he or she could have gone to the $55 strike price. Maybe that could take place in the future . . . for now . . . it’s covered!
The Covered Writer
Systematic Covered Writing … more than just covered calls! Recover After Expiration: The Math Exercise Date Recovered Friday, September 22, 2006 Stock Symbol KLAC Call Symbol WPQAJ Cost Basis $52.690 Current Option Bid $4.50 Number of Shares 100 Strike Price $50.00 Initial Trade Entry Date 13-Apr-04 New Expiration Date 19-Jan-08 Previous Cash Generated $1,939.40 New Cash Generated $441.75 Stock Investment $5,276.00 Back to cash Gain $2,088.15 Annualized if Called (1) 10.50% If Called Current Total Cash in Hand $2,381.15 Percentage of Investment* 45.13% Position Duration if Called 1376 Days * The net cash generated divided by the net cash invested. This is the 'downside protection'. This is not a profit percentage. It could be called the 'Stock Ownership Risk Reduction Percentage'. (1) The Annualized percentage rate is calculated by dividing the 'Return if Called', by the duration of the position in days, and then multiply the result by 365. If the duration is less than one year, it is important to realized that an assumption is being made that the same (or similar) transactions could be executed over the course of a year. There is no guarantee that this could be accomplished. Also note that the shorter the duration of the position, the more significant this caution becomes. PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN KLAC 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: 02/05/07