Systematic Covered Writing

 . . . more than just covered calls . . .

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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,

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Tax Deferral Strategy Example

TODAY'S DATE: October 14, 2007

THE STOCK:  Genitope Corporation (GTOP) is a biotechnology company focused on the research and development of novel immunotherapy's for the treatment of cancer. Immunotherapy's are treatments that utilize the immune system to combat diseases.

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 year's 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 to itemize he or she can find, an investor should do the same.

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THE COMMENTARY:  The fruit of the labor. 

On August 13, 2007, subscribers received an e-mail message announcing the establishment of the following TDS position.

Today is October 14, 2007.   The current price of GTOP is $3.54, and the current ask price for the Jan $2.45 option is $1.95.  With these prices, the writer can use the Close it or Wait Excel template, or simply enter the math manually into the Position Tracker database to see if closing this GTOP position at a profit is feasible. Keep in mind the purpose of this position is to create a paper realized capital loss.  Lets take a look . . .

There are five contracts of the GTOP Jan $2.50 calls.  The cost to close would be as follows:

(Shares x Ask Price) + Base Commission +Contract commission = COST

(500 x 1.95)  + $7.00 + (5 x 1.25) = $975 + $7.00 $6.25 =  $988.25

The proceeds from selling the 500 shares of GTOP would be as follows:

Shares x Price - Commission = Proceeds

500 x $3.54 - $7 =  $1763.00

Now, assuming we can be filled at these prices, lets take a look at how this TDS position could end tomorrow (Monday October 15, 2007):

Again . . . assuming the writer can be filled at the listed prices, this TDS position should be closed tomorrow.  The TDS position will end with a small gain, and by switching the cost basis to the older holding in this portfolio, a loss will be created.

FOLLOW UP

This example will be updated once the transactions are executed.

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN GTOP 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!

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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 © 2007. All rights reserved.
Revised: 10/14/07