Friday, April 30, 2010

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 May2010:
04/30/2010 Bought 400 EEM @ $42.55
04/30/2010 Sold 4 EEM May2010 $43.00 Calls @ $.85

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. So far this year, emerging market stocks have underperformed developed market stocks, but this advisor believes that trend is poised to reverse. In this regard, six factors that favor emerging markets include: cheap exchange rates, cheap labor, improving quality of labor, a clearly superior quantity of labor, lower corporate tax rates, and growing economies of scale.

Two possible overall performance results(including commissions) for the EEM transactions would be as follows:
Stock Purchase Cost: $17,028.95
= ($42.55*400+$8.95 commission)

Net Profit:
(a) Options Income: +$328.05
= (400*$.85 - $11.95 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If stock price unchanged at $42.55):
-$8.95 = ($42.55-$42.55)*400 - $8.95 commissions
(c) Capital Appreciation (If exercised at $43.00): +$171.05
= ($43.00-$42.55)*400 - $8.95 commissions

Total Net Profit(If stock price unchanged at $42.55): +$319.10
= (+$328.05 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $43.00): +$499.10
= (+$328.05 +$0.00 +$171.05)

Absolute Return if Unchanged at $42.55: +1.9%
= +$319.10/$17,028.95
Annualized Return If Unchanged (ARIU) +31.1%
= (+$319.10/$17,028.95)*(365/22 days)

Absolute Return if Exercised at $43.00: +2.9%
= +$499.10/$17,028.95
Annualized Return If Exercised (ARIE) +48.6%
= (+$699.10/$17,028.95)*(365/22 days)

Downside Breakeven Price Point: $41.70
Downside Breakeven Protection: 1.9%

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