Systematic Covered Writing

... more than just covered calls!

GLOSSARY

DEFINITIONS

Note that the following definitions may be specifically worded for Systematic Covered Writing.

ASK -  This is the price for which you can buy either a stock or an option.   Note that most internet websites you can view without charge are listing information that is delayed at least 20 minutes, which is fine for doing research, but not adequate for entering or closing positions.

ASSIGNMENT -  When a call option is exercised and your stock is sold it is referred to as being 'assigned'.  Assigned means sold, because the brokerage firms 'assigns' a stock position to satisfy the option.

BID -  This is the price for which you can sell either a stock or an option.  Note that most internet websites you can view without charge are listing information that is delayed at least 20 minutes, which is fine for doing research, but not adequate for entering or closing positions.

CALL - The call option is a 'right to buy'.  Specifically, it is the right, but not the obligation, to purchase shares of a stock at a specified price (the strike price) on or before a specified date (the expiration date).

CONTRACT - Stocks are exchanged in shares.  Options are exchanged in contracts, where one contract is equal to 100 shares of stock.

CLOSED - A transaction is closed when both a buy and a sell transaction for the same entity have been completed.  The entity may by a stock or it may be an option written against a stock position.  In the case of a stock, the buy, or purchase, happens first. Eventually the stock may be sold to 'close' the position.  With the call option the selling transaction proceeds the buying transaction, but regardless of the order, when both have been completed for a specific expiration month and strike price, the option is 'closed'.

EXPIRATION - Option contracts have an expiration, which means that once the specified expiration date passes, the option becomes worthless.  For practical purposes ... option contracts expire at market close on the third Friday of the option month.  For example an Aug $25 call option will always expire on the third Friday in August.

LONG - When you purchase a stock or other security it can be, and often is described as being 'long' the position.

POSITION -  The individual stocks held in a portfolio.  A position is opened by purchasing a multiple of 100 shares of stock and the position is closed when the stock is ultimately sold.  The actual purchase of the stock is referred to as one of possibly many transactions within the position.

TRANSACTION - When an equity is purchased or sold.  The equity can be a stock or a call option and both are bought and sold.  Transactions are the 'trades' that take place within a position.

ROLL - Rolling an option means to buy back the current option and sell a new option.  The difference is the expiration month. For example you could buy back a July $20 call option and sell a September $20 option.  This process is called 'rolling' the option.

SHORT - If you sell a stock, or in the case of Systematic Covered Writing, you sell a call option that you do not own then you sold the option 'short'.  In a covered call position, the investor is always long the stock and short the call.  This is because you buy the stock and you sell the call.

STRIKE - The strike, or strike price, is the price you are agreeing to sell your stock for when you sell a call option.  To avoid confusion on this website options will generally be expressed with a $ sign.  Whereas a Sep $25 call option will often be observed in print as the 'Sep 25' option.  The dollar sign is added to alleviate reading this as September 25th.  The 25 is not a day ... it is the strike.

UNDERLYING - In a covered call position, the stock that the call is written against is referred to as the underlying position, or underlying stock.  The option is 'covering' the stock, which makes it 'underlying'.

EXPRESSIONS

Closed Position - The final transaction within each position is selling the stock.  Once this takes place, the position is closed and a net gain or loss can be determined.

Extrinsic Value - The difference between the stock price and the strike price MINUS any intrinsic value.  If the strike price is above the stock price, the option's value is 100% extrinsic.  If the strike price is below the stock price, the option will have both intrinsic and extrinsic value. (see Intrinsic Value below)

Initial Position - The initial position is composed of two transactions.  First, a minimum of 100 shares of stock are purchased, which makes it the first transaction taken.  After the purchase, a corresponding number of contracts are sold, which is the second transaction.  Combined, these two transactions make up one Initial Position in a Systematic Covered Writing portfolio.

Initial Call Option - The first call that is sold against a stock position in the portfolio.  This call,  along with the stock, make up the Initial Position.

Intrinsic Value - When a strike price is below the stock price, the option is said to have intrinsic value.  This value is literally the difference between the strike price and the stock price.  IN ORDER FOR AN OPTION TO HAVE INTRINSIC VALUE, THE STRIKE PRICE MUST BE BELOW THE STOCK PRICE.  (see Extrinsic Value above)

Option Chain - A list of available options for a given stock.  These tables are generally arranged by expiration month and then by strike price.

Option 'Trade Types' - When an option is sold within the Systematic Covered Writing portfolio, it will fall into one of four categories or types as follows.

  1. Initial Call - This is the first option sold.  The transaction should occur immediately after the purchase of the stock.

  2. Continued Trade - This means the option is at the same strike price as the Initial Call Option.

  3. Interim Trade -  This means, the option is at a strike price, which is below the Initial Call Option and far enough below the cost basis of the stock, that efforts will be taken to try and prevent the option from being exercised.  This is possible because it is highly unlikely for an option to be exercised early.  It is important to realize that the person owning the call option has the right to exercise the call and purchase the underlying stock.

  4. Appreciated Trade - This means that the current option is at a higher strike price than the Initial Call Option. 

X-Dividend - The date after which you will not be entitled to a declared dividend if you sell the stock.  You must hold the stock through the 'X' date in order to be eligible for the dividend.

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SYSTEMATIC COVERED WRITING
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Revised: 12/08/06