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Tuesday, April 21, 2009

Establish iShares MSCI China ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI China ETF (FXI). A summary of the transactions today is as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for May09:
04/21/09 Bought 1200 FXI @ $31.52
04/21/09 Sold 12 FXI May09 $33.00 Calls @ $1.10

China ranks #1 in this advisor's '2009 Country Value Rankings'(see chart below). Some of the key value-oriented metrics for China are as follows:
- Real GDP growth of approximately 6.0% in 2009. This compares with a projection of negative growth this year in most of the world's major countries.
- Estimated inflation of 0%
- Price/Book ratio of 2.66 is a below-average valuation relative to other countries (for example, U.S. is currently at 3.86).

The FXI ETF was selected as the primary investment vehicle for achieving wide exposure to China's stock market performance. It consists of market-cap-weighted positions in the 25 largest companies in China, and although it is most heavily weighted in the financial, energy, and telecommunications sectors, it still provides a relatively good way to diversify across the Chinese economy. Since China remains as the Covered Calls Advisor's top investment idea, a major commitment of 19% of the total CCAP is now allocated to FXI covered calls. Moreover, as a direct reflection of this Advisor's current bullishness regarding China, a bullish covered calls position(4.7% out-of-the-money) was established.

Some key indicators for this FXI covered calls position is:

Absolute Return if Stock Price Unchanged at $31.52: +3.5%
Annualized Return if Unchanged (ARIU): +51.0%
=($1.10/$31.52)/(365/25 days)

Absolute Return if Exercised at $33.00: +8.2%
= [$1.10 + ($33.00 - $31.52)]/$31.52
Annualized Return if Exercised(ARIE): +119.5%
= [$1.10 + ($33.00 - $31.52)]/(365/25 days)

Downside Breakeven Price Point: $30.42
Downside Breakeven Protection: 3.5%

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