SYSTEMATIC COVERED WRITING

As can be expected, there needs to be an existing position. In this case the Initial Position was established in February of 2004 as the following table indicates.

Date		Position	Investment	Generate	Total
27-Feb-04	Initial Stock Purchase	Buy 100 OSTK @ 27.80	($2,805.00)
		Overstock Com
27-Feb-04	Initial Call Option	Sell Jun $25 call @ 5.60		$535.00
					$535.00

By April, the value of the stock had increased to $36.00, and the 'news' seems to indicate that this stock was headed higher. With the stock trading at more than $10 above the $25 strike price, the June option would be exercised sooner or later. Liking the OSTK 'story', the covered writer wanted to reduce the effect of the stock being called. Roughly, the position would be 'giving back' $280 of the $535 that was generated when the option was sold. This can be 'seen' because the option strike price is $2.80 below the stock purchase price. With this in mind, one can see that the position will end with a realized capital gain of about $255.

Understanding the benefit of reducing realized capital gains by creating 'paper' realized losses coupled with the desire to maintain a holding in Overstock.Com inspired the following Reverse TDS position to be established.

Date	Strategy	Position	Investment	Generate	Total
19-Apr-04	Initial Stock Purchase	Buy 100 OSTK @ 36	($3,625.00)
		Overstock Com
19-Apr-04	Initial Call Option	Sell Dec $35 call @ 8.10		$785.00
	Reverse TDS Position				$785.00

It is important to keep in mind the IRS wash sale rule, which states that multiple positions must be maintained in the portfolio for a minimum of 30 days. This way the covered writer can 'choose' either the $3,625.00 or the $2,805.00 cost basis when (if) the Jun $25 option is exercised or closed early.

IMPORTANT: (You will read this more than once!) In order to make use of the Systematic Covered Writing Reverse TDS strategy, the investor must be able to specify the lot of stock being sold with the brokerage firm. For example, at E*trade, this is accomplished by choosing the 'lot identification' method instead of FIFO or LIFO when setting up the account. At Ameritrade, the investor sends a written memo to the firm. The point? If you cannot specify lots, you cannot use this strategy. It's that simple.

As it turned out the February position was closed in early June to 'free' up funds for a new position. At that time, the stock was trading slightly below the April $36.00 price. The transaction data for the closed position is presented below.

Date	Strategy	Position	Investment	Generate	Total
27-Feb-04	Initial Stock Purchase	Buy 100 OSTK @ 27.80	($2,805.00)
		Overstock Com
27-Feb-04	Initial Call Option	Sell Jun $25 call @ 5.60		$535.00
4-Jun-04	Buy Call to Close Option	Buy Jun $25 call @ 10.90		($1,115.00)
4-Jun-04	Sell Stock to Close Position	Sell 100 OSTK @ 35.49	$3,524.00	$719.00
		Net Cash Gain			$139.00

The position is closed with a net (back to cash) profit of $139.00. This may not seem like much, but factor in the conservative nature of the initial position. Also, an investment of $2805 generated a profit of $139.00 in four months. The return percentage is the net profit divided by the net investment or 139 / 2805 = 4.955%. If similar positions could be executed over the course of a year, the annualized return would be equal to three times the return for four months or 14.86%. Now let's look at how the Reverse TDS position factors into the equation. Here is how the February position will be reported to the IRS on Form Schedule D for 2004 tax year.

Date	Event	Cost	Proceeds	Gain
4/19/04	100 Shares OSTK Purchased	($3,625.00)
2/27/04	Jun $25 call Option Sold		$535.00
6/04/04	Jun $25 call Option Purchased	($1,115.00)
6/04/04	100 Shares of OSTK Sold		$3,524.00
	TOTALS	($4,740.00)	$4,059.00	($681.00)

Remember the brokerage firm will report the sale of 100 shares of OSTK on June 4, 2004 for $3,524.00 on IRS Form 1099. At the time of sale, the covered writer identified the stock being sold as the $3625.00 basis. There are two purchases of 100 shares of OSTK in the portfolio, and both purchases have been held for more than 30 days, the covered writer can choose the cost basis for the shares that were sold. Did the covered writer make money or loose money? The correct answer is 'both'. A realized capital gain of $139.00 was generated, and at the same time a realized (but paper) loss was created though the use of the Reverse TDS concept developed for Systematic Covered Writing.

Can it get any better than that? Well . . . yes! As a bonus example let's continue with the OSTK position that was still be active in the portfolio when the position above was closed. To make it easy . . here is the data again.

Date	Strategy	Position	Investment	Generate	Total
19-Apr-04	Initial Stock Purchase	Buy 100 OSTK @ 36	($3,625.00)
		Overstock Com
19-Apr-04	Initial Call Option	Sell Dec $35 call @ 8.10		$785.00
	Reverse TDS Position				$785.00

Great news caused the value of OSTK to climb significantly between June and November of 2004. How about it was trading at over $60 per share! Keep in mind that the covered writer is always aware of the 'potential realized capital gain position'. Because of closed positions that resulted in gains, the need to 'create' losses was still apparent in November. The thought process was this ... OSTK is trading at over $60 in November, the December option will be exercised resulting in additional gains for 2004. Can that gain be deferred to 2005 and create a realized 'paper' loss at the same time? That is the question and here is the answer. Sure.

Date	Strategy	Position	Investment	Generate	Total
19-Apr-04	Initial Stock Purchase	Buy 100 OSTK @ 36	($3,625.00)	TDS Used
		Overstock Com
19-Apr-04	Initial Call Option	Sell Dec $35 call @ 8.10		$785.00
17-Nov-04	Buy Back & Roll Out	Buy Dec $35 call @ 23.50		($2,375.00)
17-Nov-04	Continued Trade	Sell Mar $35 call @ 24.20		$2,395.00
					$805.00

The Dec $35 option was closed by purchasing it for $2,375.00. As can be seen, it was originally sold for $785.00. The December option is now closed, which means it is reportable to the IRS as a capital event for 2004. That event is a realized capital loss of $1,590.00. Notice that the other transaction, which took place on November 17, 2004 was the sale of a Mar $35 call. The amount of net cash generated by that sale was $20 more than the net cash used to close the Dec $35 call. Realize that it was the $1590.00 loss that was created for the 2004 tax year that inspired the position to be rolled to 2005.

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 suggested 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 provided for 'educational purposes' for the sole purpose of illustrating the Systematic Covered Writing strategies.