Copyright 2016  by Rich MacDuff    All Rights reserved    E-Mail: rlcoveru@cox.net
Systematic Covered Writing
   ... more than just covered calls
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EXPECTATIONS

We need to have reasonable expectations if we are going to be satisfied with the results we achieve over time. Without a doubt, understanding how we measure our success is a key component to the topic at hand. If you have not read Understand Value, I would probably do that before continuing. We really need to be on the same page in order to communicate. This does not mean you have to agree with me, but rather we should have an open mind to the SysCW way of thinking. Know that we do not invest with the purpose of watching the balance on our monthly statement increase. We believe it will, but it is not a requirement.

Our objective is different that what we have been taught by main street investment philosophies. Our goal is to be able to generate a reasonable amount of cash with our investments over time. Let's say we had $30,000 to invest. That is our starting point. Our goal is to invest such that the original $30k can generate a reasonable amount of cash, and that over time, that 'amount' will increase. Notice the difference here ... nothing was mentioned about the value of the investments, but rather the results of the investments. Our 'results' are measured by the new cash that is generated each month.

We know that we are going to be holding stocks that have lost value. I discuss this in some detail in the discussion about Destiny. We need to realize that no matter how good we think a stock is, it is still subject to losing value. For example, there are many fund managers holding shares of AAPL. Other than dividend payments, an investment in AAPL when it was trading at around $133 a share last year is not panning out so well. As of June 24, 2016, this stock was trading at $93.40. The traditional investor now has to wait for the stock to move back to $133 just to be even.

Any previous purchase of shares of AAPL above $93.40 is in a similar situation, though the wait may not be as long. We could pick 100's of stocks and have the same discussion. Please realize this is way so many folks stay out of the stock market. The fear of loss in value is very compelling. If you have read the other information provided in this section, you should realize that our approach is not to worry about the value, but rather concentrate on generating cash with our investments.

In evaluating the cash generation process, we need to realize there are several ways or events that affect the cash that is generated during a given month. We also need to take into account that since 2014, there has been a major shift in the SysCW approach. This occured when the option contracts began trading weekly. In looking forward, we want to base our outlook on how we are trading now, and not how things were done prior to 2014. It's not like the process did not work back then, just no where near as well as it does now. Here is how we generate cash.

The primary source of cash is from the sale of option contracts. These may be call options sold against stock that is owned, or Put options sold against stock that we may own. During each month, we Buy and Sell option contracts. At the end of the month, we simply add up the net results of that activity.
During a given month, stock may be sold that results in a profit or a loss based on the original purchase price. It is only when positions are closed that we account for this change in our cash position. Please realize, the original investment needs to be reestablished from the proceeds and or cash that is available. The liquidation of a position is NOT a source of cash, only the profit or loss is included in the total for the month. In order for SysCW to continue on and on, the amount invested in the marketplace needs to remain constant, or increase. This is very important. If we sell a rental house, we need to replace it with one of the same value or higher may be a clearer way to grasp this thought.
There are times when an unfavorable assignment occurs. This means a stock was sold at an interim strike price. When this happens, we eventually repurchase the stock. When that happens, we need to account for the difference in the proceeds and the repurchase amounts as a gain or loss for the month. Sometimes we come out ahead, sometimes we don't.
Dividends and any miscellanious fees also need to be accounted for as part of the cash generation process.
Within any portfolio there are eventually going to be two kinds of positions. There will be positions that have Closed or ended. We refer to these as being 'back to cash'. The net results are fixed. We either made money or we didn't. We will begin contemplating what to expect by looking at some recap totals from a number of SysCW portfolios.
As you can see from just these six portfolios, the Average Annualized Returns vary from portfolio to portfolio. There are a number of reasons for this. Some investors like to be more conservative. They do so by either using dividend paying stocks, or strike prices that are further away for the current price of the underlying stock when the position is established. Even here, there can be a significant variation in the return. If a dividend capturing works as planned the with the first call, the return when annualized will be much higher than if it takes a number of weeks to 'get out'.

Likewise, if you keep the duration short, the return can be higher. Instead of establishing a position on Monday, the investor could wait until Tuesday or Wednesday to establish a position for the upcoming Friday. By giving the stock less time to move, one could make a habit of getting in and getting back to cash. Some investors may have more two-week positions than others. This will also affect the return when annualized.

I think it is safe to assume that positions that Close within a few weeks do quite well using the SysCW approach to investing. Realize that in most cases, the underlying stocks did not need to appreciate. This is because we normally use a strike price that is slightly below the current trading price. In doing so by the end of the duration, the stock could have gone up, it could have stayed the same, or it could have gone down a little and the position will still work. I hope you see there are a lot of factors that can influence the actual return when annualized for Closed Positions.

I think one would be safe in assuming that the Closed Positions are going to end up generating cash at an annualized rate of 25% to 30%. Notice I am being very conservative with that statement. I do think it would also be safe to say that it does not matter what size the portfolio happens to be. Positions that work ... work. It's as simple as that.

Now we come to the positions that have not worked. These can either be covered call positions or continued cash secured put positions. In general the one thing they have in comon is the price of the underlying stock is lower than when the stock was purchased. These positions will also really vary in the rate they are generating cash. A discussion of all the possibilities is once again beyond the scope of this dicussion. A simpler approach would be to simply look at the results for the portfolios above over a number of months.

The data will be reported using a couple of different formats. The end result is the same ... how much cash are we currently generating?

To the left we have a screen shot from the $5k Portfolio. As of June 25, 2016, this portfolio has been in play for 139 days. It has done quite well, which is due to the fact that in the beginning, almost every position 'worked'. While there is nothing wrong with that, we surely should not expect it.

If we look at June, we can see that so far this month a total of $61.99 has been generated. There will be one more new posiition established before the month is over. As it looks right now, we should bring in about $50 in additional cash. So, based on June ... how is this investment doing?  The math is pretty simple.

$112 per month times 12 months per year divided by the $5000 investment equals 26.88%

In other words, if we can generate $112 in new cash each month, at the end of a year our $5000 investment will have generated 26.88%. So, with this portfolio, we could easily say we should generate somewhere between 20% and 25% annually. Notice I once again am being very conservative.
Please note ... while it is mathmatically true that this $5k portfolio has generated cash at an annualized rate of over 100% as of June 25, 2016, in no way do we think we will be there at the end of 365 days. Would it be safe to say we will come in above 20%? Absolutely. That is because we already have $1,997.25 'in the bank'.  Next up, we have the $30k Portfolio.
To the right we have the current data for the $30k Portfolio. This is a combination of all of the Closed Positions, plus all of the Active Positions. Our Positions Track Excel file keeps track of the cash that is generated as new activity is posted. It tells us where we are, and where we have been so that we may gain a feel for where we are going. Please note, the average Active Position does not generate as much cash as the average Closed Position.

Once again, in looking at June, we do have one more week to go before we close out the month. The are a number of positions that will see activity during the last week of June. Lets be conservative and say we finish the month at $850. We can once again 'do the math'.

$850 per month times 12 months divided by the $30,000 investment equals 34%

Again, I think this is a little on the High side, but as of today, it is what it is.
Is it possible to end up with the entire investment generating 30%? I guess so, but we are not even a third of the way into the year yet. The longer we do this, the more accurate the projection will become due to the fact that it is based on a larger sampling.
This is the other format we have to look at the cash generated per month. What you are looking at here is the totals to date for April, May, and June for the SysCW Portfolio known as the GI Portfolio. Each month we keep track of the net change in cash generated. This includes all four aspects mentioned above. Notice that the return when annualized will vary from month to month. This all has to do with the market conditions at the time.

It also depends on how aggressive a writer happens to be when writing interim call options. From the tutorial, you should realize the higher the strike price, the lower the premium. On the other hand, the higher the strike price, the greater the odds are that an interim call will not have to be rolled. More often than not, we do not make as much money when options are rolled.

If we take the three percentages and averaging them we come up with 23.54%. I think it would be safe to say that if we can continue doing what we have been doing that this portfolio should be able to generate new cash at an annualized rate 20% to 25% per year.

Of course we can never assume that past performance is an indication of future results, but currently, the results are what they are.

To the right we have the data for the $132k Portfolio. Same story as the for the GI Portfolio. Each month we can evaluate the cash generation process. Over time, our goal is to learn what works, and what does not work. Please know that SysCW is evolving as market conditions change. For example, a few years ago we did not write weekly call or Put options. Not because we did not want to, but rather because they did not exist.

If we average the three monthly percentages for this portfolio, we see that the entire portfolio generated cash at an annualized rate of 23.19%. So ... is it possible to generate cash at an annualize rate of between 20% and 25%? I hope you agree we me that it sure looks that way.

The rate any individual investor ends up with depends on a lot of factors. Luck, for the most part, is not one of them. Please note that for the monthly data provided, in the vast majority of instances, the positions we are dealing with have LOST VALUE. It's okay. We know that is going to happen. We just need to learn to follow the cash and not the value and we will be just fine.
I hope the information provided helps you in determining what to expect from a SysCW Portfolio. It should be obvious that record keeping is an integral part of the process. If one struggles with that, we do offer a Data Management Service. One could take advantage of this until he or she is comfortable on their own. By providing information concerning a $5k Portfolio, I hope to have shown that you do not need a large account to begin. The information above is intended to help you get a handle on what to expect. One thing for sure, you should expect to be eventually holding positions that have lost value. It's just the way it is.