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Thursday, October 22, 2009

Establish iShares MSCI China ETF Covered Calls

Last week a covered calls position with a Nov09 expiration was established in the iShares MSCI China ETF (FXI). At that time it was mentioned that since China continues to rank #1 in this advisor's '2009 Country Value Rankings', it was likely that an additional position in FXI might be established this week. Today, the CCAP position in FXI was doubled to a total of 1,000 shares with the purchase of iShares MSCI China ETF (FXI) covered calls as follows:

Established iShares MSCI China ETF (FXI) Covered Calls for Nov09:
10/22/09 Bought 500 FXI @ $43.73
10/22/09 Sold 5 FXI Nov09 $44.00 Calls @ $1.40

Some possible overall performance results(including commissions) for this FXI investment would be as follows:
Stock Purchase Cost: $21,873.95
= ($43.73*500+$8.95 commission)

Net Profit:
(a) Options Income: +$691.05
= (500*$1.40 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation(If stock price unchanged at $43.73): -$8.95
= ($43.73-$43.73)*500 - $8.95 commissions
(c) Capital Appreciation (If stock exercised at $44.00): +$126.05
= ($44.00-$43.73)*500 - $8.95 commissions

Total Net Profit(If stock price unchanged at $43.73): +$682.10
= (+$691.05 +$0.00 -$8.95)
Total Net Profit(If stock exercised at $44.00): +$817.10
= (+$691.05 +$0.00 +$126.05)

Absolute Return if Stock Price Unchanged at $43.73: +3.1%
= +$682.10/$21,873.95
Annualized Return If Unchanged (ARIU): +37.9%
= (+$682.10/$21,873.95)*(365/30 days)

Absolute Return if Stock Exercised at $44.00: +3.7%
= +$817.10/$21,873.95
Annualized Return If Exercised (ARIE): +45.4%
= (+$817.10/$21,873.95)*(365/30 days)

The downside breakeven price for this out-of-the-money position is $42.33 ($43.73-$1.40), and as such provides a downside profit protection of up to 3.1% below the purchase price.

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