Systematic Writing
The following is from the book Options Essential Concepts and Trading Strategies,2nd edition. It's put out by The Options Institute: The Educational Division of the CBOE.
I recommend the book, available at most bookstores. The author of this chapter Harrison Roth, also wrote LEAPS, another book I enjoyed.
I quote:
SYSTEMATIC WRITING
This term usually refers to the investor whose business, so to speak, is covered call writing. It is contrasted to the trader who occasionally makes use of that strategy to produce incremental income, obtain a downside cushion, or scale out.
Here, systematic writing refers to an almost mechanical approach. Start off by writing puts on the stock you have selected. If the stock rises, you are ahead by the premium. If the stock falls, you are assigned on the puts and now own the stock. Then write covered straddles. If the stock rises, you are assigned on the calls and have collected three premiums. If the stock falls, you will be assigned again and have a double position in the stock. Now write as many calls as you are long stock. If the stock rises, you are assigned and have collected four premiums. If the stock falls, you will be long and wrong. But the resulting unrealized loss will not have come from options, but because you chose a stock the went down three times when you had predicted an upward move each time. Even then, you would own the stock at a cost basis that was reduced by four option premiums.
A straddle is equal numbers of puts and calls at the same strike. You can be long straddles or short straddles. The strategy above uses short straddles. A covered straddle is long stock/short call/short put. |
