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,

TTWO    Take-Two Interactive Software, Inc.

THE TRADE  DATE :   November 17, 2006

THE STOCK:    Take-Two Interactive Software, Inc. (TTWO) develops and sells interactive entertainment software games and accessories for PCs, and for game systems offered by Sony, Nintendo, and Microsoft.

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 select the cost basis for stock that has been sold so long as two 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 two statements make up the Wash Sale Rule.

Existing Position

The active position illustrates Dollar Cost Averaging a position on more than one occasion.  Note that the initial purchase of 100 shares became 150 shares in January 2005, thanks to the 3:2 stock split.  Also note the interesting split Recover After Expiration strategy that was used to establish the current option positions.  The stock is now above the Dec $15, so that option will be rolled.  But . . . the point of this example is the TDS position that closed on November 17, 2006.

TDS Position

This position ended with a predetermined small gain, which is actually not bad when annualized.  With that in mind, realize that the major benefit of this position is the paper loss that was created  . . . . systematically!

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.

		SysCW   Realized Gains Tracker
		Stock	Option
Buy Date	Sell Date	Symbol	Symbol	Opening Position	Basis	Proceeds	Gain 2006
13-Apr-04	17-Nov-06	TTWO		Buy 100 TTWO @ 35.31	($3,538.00)	$1,862.21	($1,675.79)
19-Sep-05	17-Nov-06	TTWO		Buy 50 TTWO @ 22.80	($1,147.00)	$620.74	($526.26)
20-Mar-06	Open	TTWO		Buy 100 TTWO @ 15.8486	($1,591.86)
Open	22-Sep-06	TTWO		Sell two '08 Jan $20 LEAPS @ 1.60		$310.49
Open	22-Sep-06	TTWO		Sell Dec $15 call @ 1.30		$121.74
11-Oct-06	Open	TTWO		Buy 200 TTWO @ $14.5472	($2,916.44)
17-Nov-06	11-Oct-06	TTWO		Sell two Nov $12.50 calls @ 2.40	Exercised	$470.48	$470.48
					Position Total for 2006		($1,731.57)

The sale of the 200 shares were allocated as follows:  Two-thirds of the proceeds were matched up with the April 13th purchase (remember the 3:2 split means the 100 shares became 150).  The other third, or 50-shares, were matched up with the Sep. 19, 2005 purchase.  The other factor is the exercised option.  Unfortunately (?), we have to count the gains also.  Note that the 'real' TDS position did not end with a $470.48 gain!  Hopefully you see that there are two ways of looking at positions.  The real open and closed positions, and the 'on paper' open and closed positions. 

Yes this requires two sets of records, which is why there is a Position Tracker and a Gains Tracker.  Some would say that seems like a lot of work . . . to them, the writer would point out that saving 15% on taxes can be 'a lot' of money.  In a way, the efforts 'pay for themselves'.

A little over a month prior to this assignment, a plan was put into place.  The goal of that plan was realized with this 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. The goal of the TDS position is to create a realized capital loss (on paper), which allows a covered writer to benefit from a depressed stock position.

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