FREQUENTLY ASKED QUESTIONS
PLEASE: If you have a question
... please ask it. Expanding this page will benefit many
readers. If you will take the time to ask the question, the time will
be allocated to provide an answer. Use this address to ask questions
about Systematic Covered Writing ...
See Internet Offer at the bottom of this page.
(Click the question to view the response.)
I asked a friend and they told me options were very risky. Is that true?
What do you do if a stock drops 20%-40% in a relative short period of time?
Instead of buying the stock, why not buy a LEAP option and use it to cover the call?
Why not just sell a put instead of establishing a 'covered' position?
What is the difference between Systematic Covered Writing and writing 'covered calls'.
What is a Covered Call?
A covered call is the combination of owning shares of stock and selling the right to buy that same stock. An analogy would be like putting earnest money down on a house. You own the 'house' (a multiple of 100 shares of a stock) and you receive 'earnest money' (the premium from the sale of a call option), which you keep even if the potential buyer defaults on the purchase. A covered writer, is an investor that buys shares of stock and sells call options against that stock. The call option gives someone the right, but not the obligation, to purchase the stock at a specified price, on or before a specified date.
Buy STOCK + Sell CALL = Covered Call Position
The call options are sold in units called contracts. One contract equates to 100 shares of stock. Please use the Glossary for additional information.
If it's so easy, why doesn't everyone do it?
This is by far the hardest question to answer. It's possible that the 'fear' of selling one's stock has prevented an in-depth look at the advantages of writing continuous covered positions. Even to this day, the information provided about covered positions often includes a caution about losing upside potential in the underlying stock if you write a call against it.. After the significant losses suffered when the bubble burst in early 2000, the idea of 'holding' on to stocks through 'thick and thin' lost some of it's appeal.
Another plausible reason, is the fact that brokerage firms don't offer covered portfolios as a choice to their clients. Because the firms don't offer it, the brokers don't investigate the advantages or disadvantages of using the technique. There are a few mutual funds that specialize in covered positions, but the fees are excessive. For now, just accept that it is easy and allow the fact that everyone doesn't use the strategy to just be an unknown.
It seems like a 'scheme' is it legal?
It does seem odd that you can sell
something that you don't own, as is the case when you sell the covered call
option. Investors can even sell stock they do not own! This is
referred to in the industry as a 'short sale'. In fact, you do not
even need to own the stock in order to sell a call option. In this
case the term 'naked' is used to described the position. Naked option
positions are extremely risky, but they are legal. The fact
that individual investors are allowed to write covered calls in IRA accounts
should be an adequate answer to the question. Writing covered calls is not a scheme and the process of Systematic Covered Writing is definitely legal.
I asked a friend and they told me options were very risky. Is that true?
Yes! Option buying is very risky. Selling 'naked' options is extremely risky. Keep in mind that neither of these risky strategies are used in Systematic Covered Writing. You cannot buy options in an IRA. Most IRA accounts do not allow investors to sell naked puts, though there are some that do. You can sell covered calls in an IRA because it is considered a conservative investment. Conservative is a relative statement given that investing in any stock position involves risks. Writing covered calls is a unique combination of a stock position and an option position and the combination of the two happens to provide the investor with less risk than just owning stock or selling calls. Systematic Covered Writing involves extensive use of the only non-risky aspect of option positions.
My broker told me covered calls don't work.
The first thing a broker is going to tell you when you mention covered calls is that they "don't work". Think about it. If the broker were to say that they do work and agree that they are more conservative than just buying stock and that you can generate an annual return that meets or exceeds your expectations, then wouldn't the next question out of your mouth be - 'why didn't you ever suggest covered positions to me'? Don't you see that any strategy you bring up would meet with the same 'lack of faith' response? They are, after all, the 'experts'. Who are you to be coming up with new ways of investing? Again, just think about it.
The other point to be made, if they provide you with an answer, is just exactly what are they basing their answer on? Have they entered thousands of covered positions since 2000? Have they ever had an entire portfolio that was well diversified, with every stock in a covered position? Have they had a covered call portfolio in existence since 2002? Once they say NO to these questions, then who are they to judge that something they have never tried extensively, will or won't work.
Most brokers have never tried writing calls against an entire portfolio of stock positions. This is because they are taught to recommend selected mutual funds or a combination of funds, bonds and cash positions in a portfolio with the portions based on your tolerance for risk.
What do you do if a stock drops 20%-40% in a relative short period of time?
SysCW is designed to work in any market. Not just ‘slightly’ up or down. If the writer sets up the trades properly, Systematic Covered Writing works just fine in a significantly up-trending market! Every call sold will be exercised and the writer will be back to cash with the suggested minimum 15% annualized return on EVERY position. What would be ‘bad’ with that?
Slightly up-trending … it still works. Some positions may be called, some may be rolled . . . it is up to the writer to allow, or not to allow calls to be exercised.
Flat market, same thing because the Initial Position strategy suggests that the writer establish calls below the purchase price of the underlying stock. With this option position, stocks could lose a little value and the calls could still be exercised.
Slightly down-trending market condition. Some stocks may be called and the funds are reinvested. Other options will still expire and the covered writer will simply write another call. (No problem!) The 15% minimum the writer took in with the initial call, assuming he or she followed the Initial Position guidelines, is retained in the account . . . and the writer collects additional premiums against the same stock.
Now for the real question . . . what if the stock loses ‘a lot’ of value, say 20-40% in a short time. This is not an issue for a Systematic Covered Writer because there is a long-term investment plan. Unlike the ‘experts’ that try to sell the idea of making 3 to 5 % every month, covered writers following the SysCW process have a long-term approach to investing. These ‘short term’ positions and strategies will not work at all in a major down trend like the market experienced in 2002. They, of course, then suggest switching to the 'other' strategy, whatever that is. The problem is . . . how do you know?
The SysCW process was being used and developed in 2001 and 2002 and stocks were being purchased and covered back then. Calls are still being written today against many of the same positions. Examples are sent out to subscribers all the time explaining the process and suggesting not to panic . . . believe in the market, believe in the companies . . . and use the SysCW strategies that explain what to do when the market goes against a position. It is a process. As an illustration of the type of information that subscribers receive, here is an example addressing the what if a stock loses value issue. Click VIEW to access this ‘don’t give up’ example.
Systematic Covered Writing provides strategies that apply and guide the writer who happens to be right . . . and the writer who is occasionally wrong. Understanding and accepting the fact that both will happen to all of us is very important!
What if I do not have Excel and do not want to purchase it?
Okay . . . please note that one could keep track of positions in a notebook, but that would be somewhat archaic and time consuming. There are free databases to use. For example, http://www.OpenOffice.org provides 'Calc' which is very similar to Excel. Covered writers can use this free product for all of the Math Exercises, the Position Tracker, the Option Tracker and the Capital Gains Tracker spreadsheets. That is the good news! The bad news is the Microsoft® Excel macros will not function.
This means that some of the information will just have to be entered manually. Support for Open Office as it applies to SysCW is provided to Deluxe subscribers for a small additional fee. The simpler solution is to just use Excel!
Why is the statement of balance at the brokerage firm different than the Position Tracker information?
Some questions deserve 'special' attention. This is one of them. Please click
for the answer to this question.
Instead of buying the stock, why not buy a LEAP option and use it to cover the call?
There are a number of reasons why SysCW does not advocate this style of covered writing. That
is not the same as saying it's a bad idea, but rather it simply does not fit the philosophy of
Systematic Covered Writing. The answer is more involved than 'just because', and if you would like to explore the
covered writer's rational, please click
for a detailed response.
With a covered position, don't you limit your upside if a stock takes off, and still have all the downside exposure (less any premium received)?
This is a very common concern, or misunderstanding, which in many cases prevents investors from using covered calls in the first place. A specific example was created as part of the introduction to Systematic Covered Writing to address this issue. To view this example please click UPSIDE. The information in that example addresses most of the concern expressed in the question. A few additional thoughts . . .
If an investor 'knew' which stock was going to "take off", then he or she would be foolish to write a call against it. FYI, the information in the booklet mentioned in the linked example was written in 1994 and it is still being used to 'scare' people to this day.
Risk - Some additional information about risk which you may find valuable is available. If you would like to explore additional thoughts please click MORE.
In researching, there seem to be extreme opinions on the benefits of writing CCs. Some views are that over time, one can generate anywhere between 2 and 5% consistently each month either on stocks you hold in an existing portfolio or newly acquired. i.e. view it simply as a cash generating method - if stock values fall away don't worry ..."
To begin SysCW wholeheartedly disagrees with the above statement. There are several relatively 'new' Web sources that propose the "two to five percent" monthly returns. Here is what 'they' are not telling you. They are not telling you that you will not be generating even 1% monthly, during a market down trend. Here is why they are unknowingly misleading the reader . . . they have not traded during a major down trend. Go to their Web site and look when their site became active. One of them even has a portfolio that you can see if you are willing to pay a significant monthly fee, but check out when that portfolio began! . . . Now look at these facts as of June 1, 2006.
(This may seem like a waste of time, but understanding what the market can do is basic to understanding what you should do.)
2006 Market Change
| 2006 Change in Index Values | ||||
| Major Index | Jan 01, 2006 | As of 6/01/06 | Change | Percentage |
| Dow Jones Industrial | 10,717.50 | 11,260.28 | 542.78 | 5.06% |
| Standard and Poors 500 | 1,248.29 | 1,285.71 | 37.42 | 3.00% |
| NASDAQ Composite | 2,205.30 | 2,219.86 | 14.56 | 0.66% |
Note that so far in 2006 the market is up-trending . . .
2005 Market Change
| 2005 Change in Index Values | ||||
| Major Index | Jan 01, 2005 | Current | Change | Percentage |
| Dow Jones Industrial | 10,783.01 | 10,717.50 | -65.51 | -0.61% |
| Standard and Poors 500 | 1,211.92 | 1,248.29 | 36.37 | 3.00% |
| NASDAQ Composite | 2,175.44 | 2,205.30 | 29.86 | 1.37% |
Note that in 2005, the overall change was 'flat to slightly' up. The market is made up of stocks. Calls are written against these stocks.
2004 Market Change
| 2004 Change in Index Values | ||||
| Major Index | Jan 01, 2004 | 31-Dec-04 | Change | Percentage |
| Dow Jones Industrial | 10,453.92 | 10,783.01 | 329.09 | 3.15% |
| Standard and Poors 500 | 1,111.92 | 1,211.92 | 100.00 | 8.99% |
| NASDAQ Composite | 2,003.37 | 2,175.44 | 172.07 | 8.59% |
The market posted a reasonable gain in 2004. Short term calls would work well in this environment.
2003 Market Change
| 2003 Change in Index Values | ||||
| Major Index | Jan 01, 2003 | Current | Change | Percentage |
| Dow Jones Industrial | 8,341.63 | 10,453.92 | 2112.29 | 25.32% |
| Standard and Poors 500 | 879.82 | 1,111.92 | 232.10 | 26.38% |
| NASDAQ Composite | 1,334.00 | 2,003.37 | 669.37 | 50.18% |
A great year. As long as you were bullish, almost any investment should have done well, including covered calls.
2002 Market Change
| 2002 Change in Index Values | ||||
| Major Index | Jan 01, 2002 | December 31, 2002 | Change | Percentage |
| Dow Jones Industrial | 10,021.50 | 8,341.63 | -1679.87 | -16.76% |
| Standard and Poors 500 | 1,148.08 | 879.82 | -268.26 | -23.37% |
| NASDAQ Composite | 1,950.40 | 1,334.00 | -616.40 | -31.60% |
Yuk! Short-term covered writers would have lost their preverbal shorts in this market. You buy a stock and sell a call with a premium of 2% to 5% and the stock goes down 15%. You are immediately in a losing position and 'they' suggest that you take the money off the table and try again.
Shorter term positions that only bring in a limited amount of cash, increase the risk of covered writing. That is not an opinion, it is a fact. We are not talking about what the stock may or may not do during the holding period. It may go up, it may stay the same or it may go down. We just don't know. If you invest in a position for $2000 and you only receive $80, by definition, you are taking a greater risk than if you buy exactly the same stock and bring in a minimum of $300. This is what the covered writer means by a 'greater risk'.
Short term advocates will go through a song and dance about how they can do more trades and generate more money. The covered writer says that may be true, but they are taking a greater risk and their strategy will only work if the market is up-trending. For what it's worth, the covered writer has been actively trading covered calls since the end of 2001.
Why not just sell a put instead of establishing a 'covered' position?
The explanation is rather straight forward, but involved enough to merit a separate page. Please click
to view the SysCW perspective on this important question.
What type of ongoing service do you offer?
The email messages in the tutorial are just a sampling of the information that is available to subscribers. The tutorial examples are for the most part 'historical'. There is nothing wrong with that if one believes in order for an investment philosophy to be viable, it needs not only to work under current market conditions, it also needs to have worked in the past and on into the future. With this concept in mind here are some of the benefits to being a subscriber:
♦ Current position activity, both newly established positions and adjustments to positions. Here are examples from May 2006 of what subscribers received.
♦ Detailed explanations of the individual strategies of SysCW are sent to subscribers. As an example, the theory behind the philosophy of Systematic Covered Writing is sent to subscribers on day one. The word count on this document is in excess of 10,000. You should like to read . . .
♦ Deluxe subscribers receive working Math Exercise Excel sheets for the various strategies. All the subscriber does is enter their data and look at the results.
♦ Individual help is provided as needed. You will find that the responses to questions will be comprehensive and returned expeditiously.
♦ Active sample portfolios are maintained with a Web presence for viewing by subscribers. The portfolios range in size from under $20,000 to over $100,000 and are updated at least monthly.
♦ Individual portfolios can be maintain by the covered writer and viewed on the Web. This service is for those that 'want to do it', but either don't have the time or knowledge base to keep up with their portfolio. Here is a real
example. The data was captured as of May and this link is not updated further.
♦ The information is all provided for educational purposes. It is through an ongoing education that covered writers can keep up with today's marketplace . . . it is to that end that the subscription service is provided.
What is the difference between Systematic Covered Writing and writing 'covered calls'?
Below is an excerpt from SysCW information available to subscribers . . .
"Systematic Covered Writing
cannot control the Market. What SysCW does do, is provide
a system of strategies that answer this question: 'What do I do Now'?
Do you know that the Internet is loaded with sites about covered call
strategies? In fact, if you used 'covered call strategies' as a
subject and did a search on Google, you would find over a million sites
available, If you would like to try this, just click this image link
type in 'covered calls' and search. From the
list of choices, it is encouraged that you look at several of websites
available. In doing so you would find several
re-occurring themes on the list of websites that are available via the search . Some of the more important
themes, as far as SysCW is
concerned, would be:
Many sites are 'pay' sites, in that there is a fee involved to obtain someone's expert opinion as to a good covered call position. Here is the SysCW challenge. Go find one site that explains in great detail what you should do after you enter the initial covered position that 'they' suggest you place.
Do you remember the five movements a stock can have, once you purchase it?
The value can increase more than 20% during or by the end of the holding period.
The value can increase by up to 20% during or by the end of the holding period.
The value can increase and even decrease, but at the end of the holding period, the price of the stock can be about the same as when it was purchased.
The value can decrease by up to 20% during or by the end of the holding period.
The value can decrease more than 20% during or by the end of the holding period.
Again ... find a site that provides a strategy to use in each of these possibilities ...."
SysCW is not just covered call writing! It is a complete, long-term, comprehensive process of investing in the equity market with two key objectives.
First: Investing where 'being wrong' does not prevent the long-term Systematic Covered Writer from generating additional cash. With every other type of investment that the covered writer is aware of, the trade, or position established must move in a desirable direction or the investor will lose money. This statement applies to (ignoring dividends) Mutual Fund purchases, individual stock purchases, and any other type of option strategy (and there are lots of them that claim to be 'the way').
Second: Investing where the 'risk' of investing in the stock market is minimized. Do you know that covered writing is the only strategy that can be used in every IRA account available. (The only exception would be if the account is with a firm that does not offer option positions at all.) Covered writing is very conservative. Systematic Covered Writing takes writing covered calls to the next level. "Knowing how to sell a call option against a stock, is to SysCW - as knowing how to add and subtract, is to calculus." There is no comparison!
