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Tuesday, August 25, 2009

Establish iShares MSCI Emerging Markets Fund ETF Covered Calls


A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI Emerging Markets Fund ETF (EEM) covered calls as follows:

Established iShares MSCI Emerging Markets Fund ETF (EEM) Covered Calls for Sep09:
08/25/09 Bought 500 EEM @ $36.64
08/25/09 Sold 5 EEM Sep09 $36.00 Calls @ $1.56

The iShares MSCI Emerging Markets Fund ETF is a diversified Exchange Traded Fund(ETF) with investment exposure in global emerging market(GEM) countries such as Brazil, China, S Korea, Taiwan, and India. Historically, GEM stocks perform well during the recovery cycle after a recessionary period. We are likely at the threshold of such a recovery since it is probable that the U.S. Institute of Supply Management(ISM) manufacturing index is likely to return to a positive reading either this month or next, and according to research from Credit Suisse "GEM has historically rallied by 41% in the 12 months after the US ISM rose above 50 (and importantly stayed above 50) on the last three occasions -- August 1996, January 1999 and July 2003. Indeed, historical P/E for GEM currently at 13.1x is similar to the 13.3x average seen at the start of those three rallies."

Some potential results from this transaction are:
Absolute Return if Exercised at $36.00: +2.5%
= [($1.56-($36.64-$36.00)]/$36.64
Annualized Return If Exercised (ARIE): +37.0%
= {[($1.56-($36.64-$36.00)]/$36.64}*(365/25 days)

Downside Breakeven Price Point: $35.08
Downside Breakeven Protection: 2.5%

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