Note: This is a copy of an actual email that was sent out to subscribers on Friday, May 26, 2006.  The information is contained in the body of the email, not on the Web site.

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From: The Covered Writer [mailto:rlcoveru@wavecable.com]
Sent: Friday, May 26, 2006 8:10 AM
To: 'Covered Writer'
Subject: RMBS- Short term - The bus is Back!

 

The covered writer is not too high on short term positions that try to generate 3-5% in a month as they provide very little downside protection.  The ‘selling’ point to this strategy is that if you can make 5% in a month, then you can make 60% in a year . . . right?  Of course they neglect to point out that you would need to successfully trade the same type of transaction twelve times in a row to actually do that . . . hence, my objection.

Now, having said that, this does not mean the covered writer is closed to the idea of a short term position.  How about one that provides over 11% downside protection and yet if exercised provides a 53% return when annualized. So, what is the difference?  It’s the downside protection.  The SysCW Math Exercise for this new position is presented below. Please note that in order to achieve the 53% annualized return, similar trades would need to be repeated over the course of a year. 

The Covered Writer

 The information presented in this email massage for educational 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, transactions, or 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 of suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  To the extent any of the information available in this communication may be deemed to be investment advice, such information is impersonal and not tailored to investment needs of any specific person.  Past results or current transactions are not necessarily indicative of future performance.

 

 

 

 

 

Systematic Covered Writing

 

… more than just covered calls!

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial Position:    The Math Exercise

 

 

Position:

100   RMBS   With   Jun 2006   $25.00   Call

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Symbol

 

RMBS

 

Call Symbol

 

 

BNQFE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock Purchase Price

$27.140

 

Call Sold Price

 

$3.30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Shares

 

100

 

Call Strike Price

 

$25.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade Entry Date

 

26-May-06

 

Expiration M & Y

 

6

2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cash Generated

$321.75

 

Net Stock Investment

$2,720.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Return if Called

$83.76

 

Annualized  if Called (1)

53.50%

  (A)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash Required for Trade  

$2,399.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage Recovered w/Option *

11.82%

  (B)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Days Until Expiration & Expire Date

 

21

 

16-Jun-06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

* The net cash generated divided by the net cash invested.  This is the 'downside protection'.

 

This is not a profit percentage.  It could be called the 'Stock Ownership Risk Reduction Percentage'.

 

 

 

 

 

 

 

 

 

 

 

 

 

   (1)  The Annualized percentage rate is calculated by dividing the Net Return if Called by the Net Stock Investment

 

and expressing the result as a percentage. This is the return for the period.  Now divide this percentage by the

 

duration of the trade in days and multiply the result by 365 to 'annualize the return'.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      It is important to realized that an assumption is being made that the same (or similar) transactions could be

 

 

      executed over the course of a year.  There is no guarantee that this could be accomplished.  Also note that

 

      the shorter the duration of the position, the more significant this caution becomes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comment:  The guidelines for establishing an Initial Position using Systematic Covered Writing, requires a minimum

 

potential back to cash return percentage (A), if the option is exercised, coupled with a minimum percentage (B)

 

of the original investment generated by selling the call option.  It is up to the writer to decide what these percentages

 

should be.  The SysCW recommendation is for both of them to be at least 15%. Remember this is a guideline

 

not a hard fast rule.  For diversification purposes, there may be times when it is necessary to hedge a little. 

 

    

 

PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN 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 © 2006. All rights reserved.
Revised: 05/29/06