RECOVER after Expiration Strategy
When the Initial Call Option expires, the scenario can vary greatly for using the SysCW Recover after Expiration strategy. The Position Tracker data tracking suggests labeling the new call option as one of three 'types'. The label expressions denote the three differentiate relationships between the active strike price, and the original purchase price of the underlying stock. They are:
Appreciated Trade - If the 'recover' strike price is higher than the cost basis of the underlying stock
Continued Trade - If the' recover' strike price is the same as the original strike price.
Interim Trade - If the 'recover' strike price is lower than the original strike price and the cost basis of the underlying stock position.
There are times, even though the previous call expired, the recovering call can be sold at a higher strike price. For example, let's say you had sold a $20 strike price, which just expired. The purchase price of the stock was $21.36. On the Monday after expiration, the value of the underlying stock holds (or increases), and after 'doing the math', you could sell either a new $20 call option or a $22.50 call option could be sold. If you chose to sell the $22.50 option (or higher), the new position would be referred to as having an Appreciated Trade status. The strike price is above the purchase price when the status is 'Appreciated Trade'. Needless to say, this is a 'good thing'.
If, given the same scenario, the $20 strike price is chosen, the position would be referred to as having a Continued Trade status. The initial call expired and was replaced with a call option that has the same strike price, just a different expiration month. This is very similar to the Buy Back & Roll Out strategy, except there is no need to 'buy back' the option because it expired.
The third possibility occurs when the stock's value falls significantly. When this happens you will find it will not be worthwhile keeping the strike price at the original price because of the lack of premium for the new call option In this case, a strike price above the current stock trading price, but below the original strike price is selected. The status of this position is referred to as an Interim Trade. When an Interim Trade is established, it is important to realize that a strike price is being established at a value for which the investor does not want to sell the stock. All he or she is attempting to do is generate cash while waiting for the price of the stock to recover.
The underling purpose of Systematic Covered Writing, is to generate cash through the sale of call options. The Recover after Expiration strategy does just that. Can you do it? Absolutely. Is it simple and easy to do? Yes. It is just another math exercise with a couple of rules to follow.
RULES
Select the highest strike price that will generate a reasonable premium based on a Math Exercise. The exception would be the choice between establishing a Continued Trade position verses an Appreciated Trade position. The second choice would provide less cash now, but the possibility of a capital gain if the stock were called at the higher strike price.
Select the expiration month as close to the current month as possible. You must also keep in mind the effect of commissions and the requirement that the premium generated is 'reasonable'.
The 'thought process' of this strategy is simply and repeatable. The examples include important additional commentary that will solidify the understanding of the
process. Make sure you review all of the examples as the commentary within is part of the strategy explanation. The Excel template for
the Math Exercise has been updated for 2008. Please select
to
view the updated strategy explanation, and instructions for this new SysCW tool.
The
historic
use the previous format. The recent example link
will use the older format prior to 2007 and the new format there after.
Please note ... the example links above are historic in nature. They are worth exploring in that we can learn from what took place in the past. We learn what works and what does not work ... what to do, and what not to do. Having said that, once you explore a number of these examples, please note that for current examples, all one needs to do is to look at the online portfolios. For example. 'THE PORTFOLIO' generally will have around 200 active positions. Within the holdings you will find numerous examples of the Recover After Expiration strategy.
This information is provided for educational purposes only and should not be considered as otherwise. No example or statement presented should be construed as a recommendation to buy or sell a security, be it a stock or call option.
SYSTEMATIC COVERED WRITING
Copyright © 2006. All rights reserved.
Revised:
04/14/11