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
TODAY'S DATE: October 19, 2007
THE STOCK: Renovis, Inc. (RNVS) is a biopharmaceutical company with a primary focus on the discovery, development
and commercialization of drugs to treat neurological diseases and disorders.
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.
THE COMMENTARY: Even though today was a significant 'downer' for the
market, the TDS position the writer established in July ended today with the assignment of three Oct $2.50 calls. Here is the closing
data as maintained with the Position Tracker.
|
|
|
|
Systematic Covered Writing |
|
|
|
|
|
|
|
. . . More than just covered calls . . . |
|
|
|
|
|
|
|
SysCW Position Tracker |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical Data |
Closed Position |
|
|
|
|
|
|
Stock |
Cash |
Total Cash |
Annualized |
|
Date |
Strategy |
Status |
Position |
Investment |
Generated |
Generated |
Gain |
|
2-Jul-07 |
Initial Stock Purchase |
Buy 300 RNVS @ 3.5175 |
($1,062.25) |
|
|
|
|
TDS |
|
|
Renovis Inc |
|
|
|
|
|
2-Jul-07 |
Initial Call Option |
Sell three Oct @ $2.50 calls @ 1.10 |
|
$319.24 |
Email 7/02/07 |
|
|
19-Oct-07 |
|
|
Sell 300 RNVS @ 2.50 |
$732.97 |
($329.28) |
|
|
|
19-Oct-07 |
TDS Created |
($3,813.53) |
Net Cash Lost |
|
|
($10.04) |
|
|
109 |
Days |
|
|
|
|
|
N/A |
Notice the writer notified subscribers of this position when it was established in July. There was a slight ($10.04) real loss incurred with this position. Due to the distressed nature of RNVS, the writer was perfectly willing
to pay $10.04 for the right to differ the tax payment on $3,813.53 in realized gains. Normally, as you will see, TDS trades end with a
small profit. This one is an exception which is proudly shared with all as part of being 'fair' in my presentation of
Systematic Covered Writing.
Oh . . . in addition, the results of this
TDS position could not be 'ignored' as the holding was part of the online $100k Portfolio. The rational behind tracking portfolios
online should be obvious. (hint: No cherry picking!)
To illustrate the tax savings, here is a look at
the RNVS section of the Gains Tracker for this portfolio, which is also online, before and after today's assignment.
|
|
|
|
Systematic Covered Writing |
|
|
|
|
|
|
. . . More than just covered calls . . . |
|
|
|
|
|
SysCW Gains Tracker |
|
|
|
|
|
|
|
|
|
|
Realized Capital Gains |
|
|
|
|
|
Stock |
Cash |
Realized |
|
Buy |
Sell |
Symbol |
Position |
Investment |
Generated |
2007 Gain/Loss |
|
19-Oct-06 |
26-Dec-06 |
RNVS |
Buy 200 RNVS @ 14.9872 |
($3,004.44) |
$629.20
|
$629.20
|
|
27-Oct-06 |
19-Oct-06 |
RNVS |
Sell two Jan $12.50 calls @ 7.10 |
($19.50) |
$1,410.45
|
$1,410.45
|
|
24-Oct-06 |
26-Dec-06 |
RNVS |
Buy300 of 600 RNVS @ 14.08 |
($4,227.26) |
$943.80 |
$943.80 |
|
24-Oct-06 |
Active |
RNVS |
Buy300 of 600 RNVS @ 14.08 |
($4,227.26) |
|
|
|
18-Nov-06 |
24-Oct-06 |
RNVS |
Sell three Nov $7.50 calls @ 7.50 |
Expired |
$2,239.18
|
$2,239.18
|
|
15-Nov-06 |
24-Oct-06 |
RNVS |
Sell three Nov $10 calls @ 6.10 |
Expired |
$1,819.19
|
$1,819.19
|
|
Active |
22-Nov-06 |
RNVS |
Sell six '08 Jan $5 LEAPS @ .65 |
|
$375.48
|
$375.48
|
|
24-Nov-06 |
Active |
RNVS |
Buy 500 RNVS @ 3.3188 |
($1,666.40) |
|
|
|
26-Dec-06 |
24-Nov-06 |
RNVS |
Sell five Jan $2.50 calls @ .90 |
($388.25) |
$436.73
|
$436.73
|
|
2-Feb-07 |
2-Mar-07 |
RNVS |
Buy 300 RNVS @ 3.7875 |
($1,053.25) |
$1,037.71
|
$1,037.71
|
|
5-Mar-07 |
Active |
RNVS |
Buy 300 RNVS @ 3.40 |
($1,027.00) |
|
|
|
2-Jul-07 |
Active |
RNVS |
Buy 300 RNVS @ 3.5175 |
($1,062.25) |
|
|
|
Active |
2-Jul-07 |
RNVS |
Sell three Oct @ $2.50 calls @ 1.10 |
|
$319.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$8 891.74 |
|
|
|
|
|
|
|
|
Now look at the same data after today's assignment of three contracts of the Oct $2.50 option.
|
|
|
|
Systematic Covered Writing |
|
|
|
|
|
|
. . . More than just covered calls . . . |
|
|
|
|
|
SysCW Gains Tracker |
|
|
|
|
|
|
|
|
|
|
Realized Capital Gains |
|
|
|
|
|
Stock |
Cash |
Realized |
|
Buy |
Sell |
Symbol |
Position |
Investment |
Generated |
2007 Gain/Loss |
|
19-Oct-06 |
26-Dec-06 |
RNVS |
Buy 200 RNVS @ 14.9872 |
($3,004.44) |
$629.20
|
$629.20
|
|
27-Oct-06 |
19-Oct-06 |
RNVS |
Sell two Jan $12.50 calls @ 7.10 |
($19.50) |
$1,410.45
|
$1,410.45
|
|
24-Oct-06 |
26-Dec-06 |
RNVS |
Buy300 of 600 RNVS @ 14.08 |
($4,227.26) |
$943.80 |
$943.80 |
|
24-Oct-06 |
19-Oct-07 |
RNVS |
Buy300 of 600 RNVS @ 14.08 |
($4,227.26) |
$732.97 |
($3,494.29) |
|
18-Nov-06 |
24-Oct-06 |
RNVS |
Sell three Nov $7.50 calls @ 7.50 |
Expired |
$2,239.18 |
$2,239.18
|
|
15-Nov-06 |
24-Oct-06 |
RNVS |
Sell three Nov $10 calls @ 6.10 |
Expired |
$1,819.19
|
$1,819.19
|
|
Active |
22-Nov-06 |
RNVS |
Sell six '08 Jan $5 LEAPS @ .65 |
|
$375.48
|
$375.48
|
|
24-Nov-06 |
Active |
RNVS |
Buy 500 RNVS @ 3.3188 |
($1,666.40) |
|
|
|
26-Dec-06 |
24-Nov-06 |
RNVS |
Sell five Jan $2.50 calls @ .90 |
($388.25) |
$436.73
|
$436.73
|
|
2-Feb-07 |
2-Mar-07 |
RNVS |
Buy 300 RNVS @ 3.7875 |
($1,053.25) |
$1,037.71
|
$1,037.71
|
|
5-Mar-07 |
Active |
RNVS |
Buy 300 RNVS @ 3.40 |
($1,027.00) |
|
|
|
2-Jul-07 |
Active |
RNVS |
Buy 300 RNVS @ 3.5175 |
($1,062.25) |
|
|
|
19-Oct-07 |
2-Jul-07 |
RNVS |
Sell three Oct @ $2.50 calls @ 1.10 |
Exercised |
$319.24
|
$319.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
$5,716.69 |
|
|
|
|
|
|
|
|
Creating paper loses is better than the old school philosophy of accepting real portfolio losses under the guise
of saving taxes, which is what 'professional' brokers have advocated for years. (They did this because they are
told to by the firms they work for in order to generate transaction fees.)
Now . . . is it
exciting that RNVS is trading so low? Absolutely not, but now that the writer has created a financial advantage, all one has to do
now is wait the required 30 days and contemplate using the Dollar Cost Averaging strategy.
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 when completing you personal income tax return in 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.
PLEASE NOTE THAT THIS EXAMPLE IS NOT
TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN RNVS 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:
10/22/07