THE TRADE  DATE :    January 19, 2007

THE STOCK:  Dendreon Corporation (DNDN) is a biotechnology company focused on the discovery, development and commercialization of therapeutics that harness the immune system to fight cancer

THE STRATEGY:   Dollar Cost Averaging

THE THEORY:   There will be times when the value of a stock declines.  The Systematic Covered Writing philosophy is ... don't panic, just follow the plan.  In this example, watch how the Dollar Cost Averaging strategy was used repeatedly on the same position to lower the cost basis.

THE COMMENTARY:     As you can see, the initial purchase of DNDN was on December 2, 2004.

In May of 2005 the first Dollar Cost Averaging purchase was made. The '05Nov $7.50 calls expired and the writer allowed the stock to sit uncovered for four months. In March of 2006 the Dollar Cost averaging strategy was used again to increase the number of shares to three-hundred.  At that time, three '06 Nov $7.50 calls were sold. 

In July of 2006, the writer elected to add an additional 100 shares,  By establishing a '08 Jan $7.50 LEAP the writer was able to generate over 28% downside protection for this newest purchase.  The plan was to recover the three-hundred share position with the same option when it expired in November of 2006. This is exactly what took place, which means the four-hundred shares are now covering four contracts of the '08 Jan $7.50 LEAP.

Please note that at the time, the writer has no idea what is going to happen in 2007!.  What the writer does know is that the total investment of $2554.80 has generated over 36% in new cash.  Keep in mind that there are two purchase dates in 2004-2005 and two purchase dates in 2006.  Let's say they were all purchased in January of 2005 . . . .Notice that January of 2008 would be three years, and this position that had lost over half its value has generated over 12% per year thanks to the Dollar Cost Averaging strategy of SysCW.

Now for the good news . . . as of April 27, 2007, DNDN is trading at over $15 a share. With the strike price being above the average net cost basis, this position will generate additional cash assuming the stock is assigned at $7.50 a share in January of 2008.  Currently, that assumption is quite reasonable, but . . . nobody knows.

Take a look at how this 'loser' will end with the assumption of assignment.

The hypothetical above indicates an annualized return of slightly over 17%.  Please note this is PER YEAR . . .and it is based on all the shares being purchased on December 2, 2004.  I trust you would agree that the actual return is greater than indicated! This position did end in 2008 with the results indicated above.

CONCLUSION: If you were to go back to the Five Principles underlying the philosophy of Systematic Covered Writing, you would see that one of them states that 'someday' the market will be higher.  Another states that we are long-term investors. These two principles together provide the physiological support for purchasing additional shares of a depressed stock. When you think about it, which stock has a higher probability of appreciating . . . one that has lost over half its value, or one that is no where near its 52 Week Low?  Unfortunately, the real answer to this question is nobody knows, but the writer tends to hedge toward the stock that has already been hammered.

Is it possible the writer could have accomplished the same gain by closing this position at a loss back in 2005 and then invested proceeds in an alternate position?  Sure . . . on the other hand, the writer could have selected another stock that lost significant value. 

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PLEASE NOTE THAT THIS EXAMPLE IS NOT TO BE CONSIDERED AS A RECOMMENDATION TO INVEST IN DNDN 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: 06/07/11