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 that 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,

SNDK    SanDisk Corporation

THE TRADE  DATE :   November 8, 2006

THE STOCK:    SanDisk Corporation (SNDK) designs, makes and markets flash memory storage products used in a wide variety of electronic systems.

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 order to use the strategy, one looks for a position within a taxable portfolio where the 'value' of the stock is significantly less than when it was originally purchased.  Take a look at this SNDK position as maintained in the portfolio Position Tracker:

The opportunity is spotted by the writer looking at two figures.  One is the Stock Investment ($6,532.54), which never changes, and the other is the current value of that stock ($4,642.00), which changes as the price of the stock ebbs and flows. 'Value' watchers will of course make their case about the stock being down some 28% . .. which for some would trigger a stop loss . . . but Systematic Covered Writers are focused on being paid, not on being right.  The 'value' issue will resolve itself over time, for now, the writer wants to take advantage of the 'situation'.

It's November 2006, and there are less then two months to 'book' losses for this year.  The writer does the Initial Position Math exercise for a short-term SNDK position.  The results of this exercise were emailed to subscribers today (11/08/06).  The Math Exercise for the new position is as follows:

	Systematic Covered Writing
	… more than just covered calls!
	Initial Position:    The Math Exercise
	Position:	100   SNDK   With   Dec 2006   $42.50   Call
	Stock Symbol			SNDK		Call Symbol			SWQLV
	Stock Purchase Price			$46.417		Call Sold Price			$4.82
	Number of Shares			100		Call Strike Price			$42.50
	Trade Entry Date			8-Nov-06		Expiration M & Y			12	2006
	Net Cash Generated			$473.75		Net Stock Investment			$4,648.70
	Net Return if Called			$58.05		Annualized  if Called (1)			12.32%
	Cash Required for Trade					$4,174.95
	Percentage Recovered w/Option *					10.19%
Days Until Expiration & Expire Date						37		15-Dec-06

Notice that the duration will be over 30-days if the Dec $42.50 option is exercised at expiration.  The strike price is about $4 below the current trading price.  With a TDS position, the writer strives to use the lowest strike price whereas the position will end profitably is exercised.  Now . . . as far as the TDS position itself . . . it's not bad!  Over 10% downside and IF exercised a back to cash gain of over 12% when annualized. (NOTE:  For shorter term positions . . . always remember that the transactions would need to be repeated a number of times in order to achieve the 'annualized' return.)

The transactions were executed and now the portfolio contains two SNDK positions as shown below:

Notice the TDS Potential of $1,827.31. This is a calculated number based on the option being exercised.  The calculation is as follows:

Proceeds from stock assignment	$4250 minus $17.99
Realized gain from the TDS option	$473.23
Cost Basis of the 'other' stock position	($6,532.54)
Net Result	$1,827.30

What is the assumption?  The writer is assuming that the option is exercised, which will happen if the price of the stock is above $42.50 on December 15, 2006.  Will that happen?  Nobody knows!  Of course, the writer knows what he or she will do if the call is not exercised . . ., which is why the process is called 'Systematic'.

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LEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN SNDK 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