Recover After Expiration - The Math Exercise
This SysCW Recover after Expiration example is intended to illustrate this strategy before it is used in
July 2007. The 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 addition 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!
OSIP - OSI Pharmaceuticals, Inc.
STRATEGY COMMENTS: As of July 13, 2007, OSIP was trading below the $35 July strike price. Assuming this relationship
still exists next Friday, the Jul $35 call will expire. Note that this holding has been in this portfolio since June of 2005 and as of
this point in time the position has generated over 38% in new cash.
A look at the history below shows that the first two $35
options expired, and the current option is the result of a Buy Back & Roll Out that was reported to subscribers on January 18, 2007.
We now look at this position some six months later.
The goal of Systematic Covered Writing is to be paid for owning stock.
Looks like that is happening in spite of the fact that the stock continues to trade below the $37.039 purchase price.
Now for the 'value' issue. On October 20, 2005 this stock traded as low as $21.65, or 41.5%
below the purchase price. Now look where the stock is today ... less than $4 below the purchase price and the writer has been paid
$14.18 a share for 'hanging' in there. Stocks will lose value . . . or possibly it should be worded that some stocks will lose value.
Dealing with stocks that appreciate from the time they are purchased is a no brainer. It is dealing with stocks that lose value
that SysCW helps emotionally by providing numerous historical (but real) examples. Enough ....
Okay,
let's take a look at what the writer may be able to do with this position in a week. The assumption is the price of the stock and
the price of options with expirations in the future will be about the same as they are today. Of course, subscribers will be notified
once the actual call is sold. Here is a list of some current prices:
|
Month |
|
Symbol |
Last |
Chg |
%Chg |
Time Value |
Bid |
Ask |
Vol |
Open Interest
|
|
August |
|
.GHUHG |
0.95 |
-0.35 |
-26.92% |
1.15 |
0.95 |
1.15 |
31 |
1,632
|
|
October |
|
.GHUJG |
2.45 |
0.01 |
0.41% |
2.45 |
2.25 |
2.45 |
352 |
1,058
|
|
08 Jan |
|
.GHUAG |
3.6 |
NA |
NA |
3.7 |
3.4 |
3.7 |
NA |
1,471
|
The decision as to which option will have a great deal to do with how much new cash the writer would like to generate.
The best bang for the buck is the one month call at $0.95. This would add $180.50 to the total cash generated while bringing the
percent of investment back in hand up to 40.68%.
On the other hand, the October call would add $440.50 and the
January call would add $730.50! If the writer can sell the Jan $35 for $3.40, the total cash generated by this position would increase
to $3,506.55, or 47.29% of the net investment. Again, it is important to realize that this is on a stock that at one point had lost
41.5% of its value.
Of course, this is all hypothetical at this point as the stock could increase or decrease
between now and next Friday . . . but it is fun to plan ahead. According to the SysCW guidelines, this position is doing quite well, in spite of its loss in value.
Comments and or questions are always
welcome. rlcoveru@cox.net
PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A
RECOMMENDATION TO INVEST IN OSIP 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