KCI - Adjustment

The following adjustment was made on KCI today.

05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00

Current Position Summary:

Stock Investment: $9,906.00
Income Generated: $1,454.00
Percent Income Generated: 14.68%
Net Profit If Called: -$452.00
Percent Return If Called: -4.56%
Annualized Return If Called: -2.44%
Days to Expiration: 683 days

Trade History:

01-Aug-05 - Initial Stock Position - BTO 100 KCI @ 59.83
01-Aug-05 - Initial Call Option - STO 1 Aug05 60.00 Call @ 1.69
22-Aug-05 - Continued Trade - STO 1 Sep05 60.00 Call @ 1.29
19-Sep-05 - Continued Trade - STO 1 Oct05 60.00 Call @ 0.54
06-Oct-05 - Buy Back & Roll Out - BTC 1 Oct05 60.00 Call @ -0.11
25-Oct-05 - Continued Trade - STO 1 Nov05 60.00 Call @ 0.44
28-Oct-05 - Buy Back & Roll Down - BTC 1 Nov05 60.00 Call @ -0.11
28-Oct-05 - Interim Trade - STO 1 Nov05 35.00 Call @ 2.04
14-Nov-05 - Buy Back & Roll Out/Up - BTC 1 Nov05 35.00 Call @ -4.11
23-Nov-05 - Interim Trade - STO 1 Jan06 45.00 Call @ 0.69
23-Jan-06 - Interim Trade - STO 1 Feb06 45.00 Call @ 0.39
21-Feb-06 - Interim Trade - STO 1 Mar06 45.00 Call @ 0.09
20-Mar-06 - Dollar Cost Averaging - BTO 100 KCI @ 39.23
20-Mar-06 - Combined Cost Basis - $9,906.00 200 @ 49.53
20-Mar-06 - Interim Trade - STO 2 Sep06 45.00 Call @ 4.59
18-Sep-06 - Interim Trade - STO 2 Dec06 35.00 Call @ 0.94
05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00

KCI is currently a losing position. It was originally purchased in Aug05 at $59.83. This is a solid company which had a virtual monopoly on it's vacuum-assisted closure (VAC) product until Medicare and Medicaid Services announced their decision to use the same reimbursement code for competitor BlueSky Medical and its own VAC product in Oct05. The stock gapped down from $56.00 to close at $34.94, or down about 38%, the following day. At this point the stock position was down about 42%.

In Mar06, I bought an additional 100 shares of KCI and now have an average cost basis, excluding option premiums, of $49.53.

Then in Aug06, KCI lost a patent infringement case against BlueSky Medical and once again the stock gapped down from $42.58 to close at $24.95, or down about 41%. At this point the stock position was down about 50%.

The Dec 35 Call options were an interim trade, meaning they were below the cost basis, and at a strike that I did not want to sell the stock. This is one strategy used to recover a losing position, but it must be monitored closely.

With less than 2 weeks until Dec expiration, the Dec 35 Calls were ITM and had only .10 time value left so the decision was made to roll out to Jun07 and up to the 40 strike to avoid assignment.

The Jun07 40 Call options are also an interim trade (i.e. below the cost basis) and may need to be rolled again. The stock position is currently down about 20%. If called the loss would be about $450. The position has generated about $1,500 in income, or about 15% of the cost basis of the stock, since inception. By Jun07 expiration the position will have been held for 683 days.

I looked at doing another dollar cost averaging but that would have put this position over 5% of total capital, which is my limit for each position. As my capital grows between now and Jun07 I may be able to do a dollar cost averaging then. Time will tell.

Since KCI is still a solid company, I'll hold it until it can be sold at a profit. While I've had losing positions, like KCI, in the past, I've never closed a position for a loss. Some positions don't work out as initially planned, but if you invest in solid companies you wouldn't mind holding, then eventually either the stock will recover or you can manage it by making adjustments until the position can be closed at a profit. The important thing is to have a plan, don't panic, and never sell at a loss unless absolutely necessary.