Thursday, October 22, 2009

Establish China Unicom Ltd. Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of China Unicom Ltd.(CHU) covered calls. The new position established today was as follows:

Established China Unicom Ltd.(CHU) Covered Calls for Nov09:
10/22/09 Bought 500 CHU @ $13.73
10/22/09 Sold 5 CHU Nov09 $15.00 Calls @ $.20

China Unicom (Hong Kong) Limited provides telecommunications services in the People's Republic of China. The company offers GSM telephone and related services, fixed-line voice and value-added services, broadband and other Internet-related services, information communications technology services, business and data communications services, and advertising and media services, as well as long distance services. As of December 31, 2008, it served approximately 133.365 million GSM subscribers in 31 provinces, municipalities, and autonomous regions in the Mainland China. In size, it is a distant second to China Mobile who now has over 500 million subscribers, but CHU's growth potential is excellent, especially in higher-end mobile handsets.

A potential short-term catalyst is that China Unicom negotiated an agreement to become the sole authorized seller of Apple iPhones in China, and they will initiate iPhone sales beginning on October 30th. Amazingly, in addition to the iPhone, China Unicom plans to release approximately 40 new mobile phone models between now and the end of 2010. Despite the very attractive growth prospects for China Unicom, at its current prices it provides an attractive opportunity for this value-oriented investor. Finally, growth prospects are enhanced even further if this advisor's impression is correct that the Chinese government is sympathetic to the idea of CHU becoming a more formidable competitor to China Mobile. As a result of these factors, a bullish out-of-the-money covered calls position was established in this instance.

Some possible overall performance results(including commissions) for the CHU transactions would be as follows:
Stock Purchase Cost: $6,873.95
= ($13.73*500+$8.95 commission)

Net Profit:
(a) Options Income: +$87.30
= (500*$.20 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $13.73): -$8.95
= ($13.73-$13.73)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $15.00): +$626.05
= ($15.00-$13.73)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $13.73): +$78.35
= (+$87.30 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $15.00): +$713.35
= (+$87.30 +$0.00 +$626.05)

Absolute Return if Stock Price Unchanged at $13.73: +1.2%
= +$78.35/$6,783.95
Annualized Return If Unchanged (ARIU): +14.1%
= (+$78.35/$6,783.95)*(365/30 days)

Absolute Return if Stock Exercised at $15.00: +10.4%
= +$713.35/$6,873.95
Annualized Return If Exercised (ARIE): +126.3%
= (+$713.35/$6,873.95)*(365/30 days)

The downside breakeven price for this moderately out-of-the-money position is $13.53 ($13.73-$.20), and as such provides a limited downside profit protection of up to 1.2% below the purchase price.