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Wednesday, July 22, 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). The previous FXI position with a Jul09 expiration ended in-the-money, so the FXI ETF position was called away. Since China continues to rank #1 in this advisor's '2009 Country Value Rankings', it was decided to establish a new covered calls position in FXI with an Aug09 expiration. A summary of the transactions today is as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Aug09:
07/22/09 Bought 1000 FXI @ $40.44
07/22/09 Sold 10 FXI Aug09 $39.00 Calls @ $2.45

Some of the key value-oriented metrics for China are as follows:
- Real GDP growth of approximately 7.5% 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 2.37 is a below-average valuation relative to other countries (for example, U.S. is currently at 3.41).

The FXI ETF was selected as the primary investment vehicle for achieving 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 15% of the total CCAP is now allocated to FXI covered calls.

Some key indicators for this FXI covered calls position are:

Absolute Return if Exercised at $39.00: +2.5%
= [$2.45 - ($40.44 - $39.00)]/$40.44
Annualized Return if Exercised(ARIE): +29.4%
= [$2.45 - ($40.44 - $39.00)]/(365/31 days)

Downside Breakeven Price Point: $37.99
Downside Breakeven Protection: 6.1%
This in-the-money position also affords up to 3.6% [($40.44-$39.00)/$40.44] downside protection available while still achieving the maximum potential annualized return-on-investment of 29.4% from this covered calls position.

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