Friday, August 28, 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 Aug09 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 Sep09 expiration. A summary of the transactions today is as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Sep09:
08/28/09 Bought 1000 FXI @ $40.04
08/28/09 Sold 10 FXI Sep09 $39.00 Calls @ $1.95

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: +2.3%
= [$1.95 - ($40.04 - $39.00)]/$40.04
Annualized Return if Exercised(ARIE): +37.7%
= [$2.45 - ($40.44 - $39.00)]/(365/22 days)

Downside Breakeven Price Point: $38.09
Downside Breakeven Protection: 4.9%
This in-the-money position also affords up to 2.6% [($40.04-$39.00)/$40.04] downside protection available while still achieving the maximum potential annualized return-on-investment of 37.7% from this covered calls position.