Wednesday, October 27, 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 Nov2010:
10/27/2010 Bought 300 EEM @ $45.55
10/27/2010 Sold 3 EEM Nov2010 $46.00 Calls @ $.99

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. During the past year, emerging market stocks have slightly underperformed developed market stocks, but this advisor believes that trend is poised to reverse. In this regard, six key 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: $13,673.95
= ($45.55*300+$8.95 commission)

Net Profit:
(a) Options Income: +$285.80
= (300*$.99 - $11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EEM price unchanged at $45.55):
-$8.95 = ($45.55-$45.55)*300 - $8.95 commissions
(c) Capital Appreciation (If assigned at $46.00): +$126.05
= ($46.00-$45.55)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $45.55): +$276.85
= (+$285.80 +$0.00 -$8.95)
Total Net Profit(If stock assigned at $46.00): +$411.85
= (+$285.80 +$0.00 +$126.05)

Absolute Return if Unchanged at $45.55: +2.0%
= +$276.85/$13,673.95
Annualized Return If Unchanged (ARIU) +30.8%
= (+$276.85/$13,673.95)*(365/24 days)

Absolute Return if Assigned at $46.00: +3.0%
= +$411.85/$13,673.95
Annualized Return If Assigned (ARIA) +45.8%
= (+$411.85/$13,673.95)*(365/24 days)

Downside Breakeven Price Point: $44.56
Downside Breakeven Protection: 2.0%

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