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: November 13, 2007

THE STOCK:  Vanda Pharmaceuticals Inc.. (VNDA) is a biopharmaceutical company focused on the development and commercialization of clinical-stage drug candidates.

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 by 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 thing.

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THE COMMENTARY:  

As you can see from the data below, the initial position using VNDA began in June with the stock trading at $21.26.  The cost basis for the June purchase is $2133.43  With the stock trading below $9.00 a share, one could easily state that this is a stock that lost 'significant' value.

Now focus on the November purchase. and notice that the writer is agreeing to sell this stock for $7.50 a share. Keep in mind this is a relatively short-term position, and as a stand alone trade . . . fits the SysCW guidelines for a new Initial Position.  As you can see, the Initial Call Option generated 15.33% of the cost of the stock . . . now look at how this second position will end . . . assuming that the option is exercised in December.

The TDS position should end with a small gain of $32.90, which when annualized is not all that bad.  Keep in mind the PURPOSE of this position is NOT to gain $32.90, but rather to create a loss.  Here is how that will happen.

The stock that is hypothetically sold for $732.97 in December will need a cost basis to go with it.  Needless to say, the TDS will be to use the older position as the cost basis ($2,133.43). The loss on the stock alone will be the difference between those two amounts, or $1,400.46. Therein lies the purpose and the thinking behind this strategy.

We will visit this example in December to see how it turns out.

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 VNDA 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: 11/13/07