Systematic Covered Writing

 . . . more than just covered calls . . .

Tax loss 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 investment 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,

Tax Deferral Strategy Example

Example Index

THE DATE: February 9, 2007

THE STOCK:  Cyberonics, Inc. (CYBX) is a neuromodulation company engaged in designing, developing and bringing to market medical devices that provide Vagus Nerve Stimulation (VNS) Therapy

WHY TDS:  There will be times when a stock loses significant value.  In a taxable account a covered writer looks at this negative event as a positive opportunity. The opportunity at hand is to use the depressed stock to create a paper realized capital loss, which in turn can be used to reduce the current liability created with realized gains. The idea is to maintain control of the capital that would be used for taxes for at least another year, if not longer.  Just as a tax payer looks for all the legitimate deductions he or she can find, an investor should do the same.

Email Comments:

The Tax Deferment Strategy of Systematic Covered Writing is one of the strong attributes to the SysCW process.  Note that it’s only February, and yet the writer is planning for NEW YEAR. This is an important philosophy to grab hold of if you have covered positions in a taxable account.

 More on this position later today . . .  

The Covered Writer

THE COMMENTARY:  For this example, the focus is on record keeping. Notice that the writer previously added TDS Used on 100 in the Cash Generated column. This is how the writer knows which positions can still be used for the TDS strategy without looking at the Gains Tracker.  The less places one has to look for the desired information the better.

Also ask youself how you would ever know this by looking at brokerage statements?  Again . . . with cut and paste, the process of keeping track of your own data is simplified.

      Systematic Covered Writing      
              . . . More than just covered calls . . .      
    SysCW   Position Tracker    
               
Historical Data Open Position  
        Stock Cash Total Cash Value as of
Date Strategy Status Position Investment Generated Generated 9-Feb-07
25-Jul-05 Initial Stock Purchase Buy 200 CYBX @ 44 ($8,808.00) TDS Used on 100  $4,090.00
  Current Price $20.45 Cyberonics, Inc.   TDS Pending    
25-Jul-05 Initial Call Option Sell two Jan @42.50 calls @ 8.10   $1,610.43    
14-Oct-05 Buy Back & Lower Buy two Jan $42.50 calls @ .35   ($79.50)    
14-Oct-05 Interim Trade Sell two Jan $32.50 calls @ 1.65 Expired 1/21/06 $320.49    
3-Feb-06 Interim Trade Sell two Mar $32.50 calls @ 1.10 Expired 3/18/06 $210.49    
20-Mar-06 Interim Trade Sell two '07 Jan $30 LEAPS @ 3 Expired 1/20/07 $590.48    
26-Jan-07 New Interim Trade Sell two Mar $22.50 calls @ .90   $170.49    
               
  Cash to Date 32.05%       $2,822.88  
9-Feb-07 Initial TDS Stock Purchase Buy 100 CYBX @ 20.1325 ($2,021.25)     $2,045.00
TDS Current Price $20.45 Cyberonics, Inc.        
9-Feb-07 Initial TDS Call Option Sell Mar $20 call @ 1.45   $136.24    
               
  Cash in Hand 6.74%       $136.24  

February 9, 2006 -  This is a straight forward application of the TDS strategy. The new (TDS) position is added to the Position Tracker by inserting lines under the existing position. Note this is not a 'combining' position, which is why the data is maintained as a unique position. The writer added the TDS Pending notation as you can see.  Also, in the left hand column, the cells are color coded and the TDS is added to the left of 'Current Price'.  These are all visual signals that inform the writer as to the purpose of the position.

The writer also opens Outlook and on March 12th adds a reminder to look at this position.  Remember . . . as soon as a TDS position can be closed at a profit, the better.  The reason March 12th was selected is because that is the first trading day AFTER the required 30 day holding period.

Now . . . what should the writer 'lose' with this position?  Just visually, the difference between half of $8,808.00 and $2,000, should be the loss.  Of course the premium from the new call will be a gain, which will make the loss come out to around $2,285.00!  Cool!

Then . . . continuing the process.  Thirty days after the TDS position is closed, the writer will consider Dollar Cost Averaging the original holding. Nothing new here . . . just repeating the same process the writer has been using since 2001! Please note that once the TDS position is used, the active cost basis becomes that of the lower priced stock.  One needs to keep this in mind before closing a given position.

Comments, questions and opinions are always welcome . . . rlcoveru@wavecable.com

The Covered Writer

Tax loss 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 investment strategies.

Example Index

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN CYBX 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 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.

Thank you!

SYSTEMATIC COVERED WRITING
Copyright © 2005. All rights reserved.
Revised: 08/03/07