Friday, October 16, 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). Just prior to the stock market close today, it was evident that the current FXI position with an Oct09 expiration would end slightly in-the-money. Since China continues to rank #1 in this advisor's '2009 Country Value Rankings', this advisor decided to continue an FXI ETF position for the Nov09 expiration, so a new position was established today. A summary of the transactions today is as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Nov09:
10/16/09 Bought 500 FXI @ $43.29
10/16/09 Sold 5 FXI Nov09 $44.00 Calls @ $1.40

The FXI ETF was selected as the primary investment vehicle for achieving broad 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 commitment of approximately 8% of the total CCAP is now being allocated to FXI covered calls. It is also possible that an additional purchase of Nov09 FXI covered calls might be made early next week.

Some possible overall performance results(including commissions) for the FXI transactions would be as follows:
Stock Purchase Cost: $21,653.95
= ($43.29*500+$8.95 commission)

Net Profit:
(a) Options Income: +$687.30
= (500*$1.40 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $43.29):
-$8.95 = ($43.29-$43.29)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $44.00): +$346.05
= ($44.00-$43.29)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.29): +$678.35
= (+$687.30 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $44.00): +$1,033.35
= (+$687.30 +$0.00 +$346.05)

Absolute Return if Stock Price Unchanged at $43.29: +3.1%
= +$678.35/$21,653.95
Annualized Return If Unchanged (ARIU): +31.8%
= (+$678.35/$21,653.95)*(365/36 days)

Absolute Return if Stock Exercised at $44.00: +4.8%
= +$1,033.35/$21,653.95
Annualized Return If Exercised (ARIE): +48.4%
= (+$1,033.35/$21,653.95)*(365/36 days)