Systematic Covered Writing

 . . . more than just covered calls . . .

Tax Deferral Strategy Example

Tax strategies are used in the Systematic Covered Writing process to defer taxes. This is no different than claiming all the deductions possible to reduce your earned income tax liability.  Having said that . . . please verify this process with your CPA .  It is important that your professional advisors are on the same page as your strategies.

As with all SysCW examples, the transactions listed in the information that follows took place on the dates listed.  Note that historical executions of various transactions may, or may not, be repeated in the future,

BCRX    BioCryst Pharmaceuticals, Inc.

THE TRADE  DATE :   November 17, 2006

THE STOCK:    BioCryst Pharmaceuticals, Inc.(BCRX) This company is focused on discovery and development of pharmaceuticals for the treatment of cancer, cardiovascular and autoimmune diseases and viral infections

THE STRATEGY:  Establishing losses is the same as claiming deductions when one files his or her tax return.  This strategy uses the fact that a stock has lost value as an opportunity to make something good happen.  The contention is . . . deferring taxes is 'good'.

THE COMMENTARY:  In this example, a TDS position has closed and the 'loss' has been created.  The data below is presented in three parts.  The first section is the existing position that had lost value.  The second section shows the data for the closed TDS position, and the third section illustrates how the data will be presented come tax time.

The IRS rule being 'used' is the one which states an investor has the right to specify the cost basis for stock that has been sold by lot identification so long as conditions are met.  First, all holdings of a given stock must be in the portfolio for a minimum of thirty days. The second rule is if a chosen basis causes a loss, then that same stock cannot be purchased for a minimum of thirty days. Together, these statements make up the Wash Sale Rule.

Existing Position

Note that the current value is still 'depressed' to say the least.  That's okay . . . there is a two step plan.  First, create a loss and then, after waiting the required thirty days, consider Dollar Cost Averaging the position.  Step one was completed on November 17, 2006 as indicated below.

TDS Position

			SysCW   Position Tracker
Historical Data			Closed Position
				Stock	Cash	Total Cash
Date	Strategy	Status	Position	Investment	Generated	Generated
11-Oct-06	Initial Stock Purchase		Buy 100 BCRX 11.73	($1,180.00)
TDS			BioCryst Pharmaceuticals, Inc.
11-Oct-06	Initial Call Option		Sell Nov $10 call @ 2.05	Exercised 11/17/06	$196.74
17-Nov-06	TDS Created	($1,102.26)	Sell 100 BCRX @ 10	$983.00	($197.00)
37	Days					($0.26)

This happens to be one of those exceptions were the TDS position ended with a small loss.  This was known when the position was established, but the tax savings on $1102.26 outweighted the less than a dollar loss.  The stock was assigned as the price of the stock was above the November strike price.

Creating the Loss

All tax strategies should be verified with your CPA as you want the professionals that assist you to be on the same page with your investing strategies.  Regulations and interpretations change throughout the year.  You are advised to keep this thought in mind. The paper loss is created by choosing the higher purchase price for 100 shares of the stock.  Keep in mind that in general equity positions that are closed are reported to the IRS in the year following their closure.  A position that is closed in 2006, will be reported in 2007, and etcetera.

Here is the data for the two closed equities involving this TDS position.

			Systematic Covered Writing
			. . . More than just covered calls . . .
		SysCW   Realized Gains Tracker
		Stock	Option
Buy Date	Sell Date	Symbol	Symbol	Opening Position	Basis	Proceeds	Gain 2006
17-Jan-06	17-Nov-06	BCRX	NA	Buy 100 BCRX @ 22.75	($2,282.00)	$983.00	($1,299.00)
Open	22-Jun-06	BCRX	BIULD	Sell Dec $20 call @ .75		$66.74
11-Oct-06	Open	BCRX	NA	Buy 100 BCRX 11.73	($1,180.00)
17-Nov-06	11-Oct-06	BCRX	BIUKB	Sell Nov $10 call @ 2.05	Exercised	$196.74	$196.74
					Position Total for 2006		($1,102.26)

The Nov $10 call becomes a realized capital gain because it is closed. The 'basis' for the option is $0.00.  Note that the proceeds from the stock sale were matched up with the January 17, 2006 purchase.  The math is the math. There are still 100 shares of stock in the portfolio and the active Dec $20 option.  (Other closed options have been omitted for clarity.)

A little over a month prior to this assignment, a plan was put into place.  The goal of that plan was realized with the stock assignment.  No 'luck' involved . . . but rather a process within a series of strategies. which covered writers can use in a 'Systematic' method . . . time and time again. Note that strategies involving tax issues should be discussed with your CPA or other professional.

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LEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN BCRX 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 © 2006. All rights reserved.
Revised: 02/05/07