Friday, November 19, 2010

Roll Up and Out -- iShares MSCI Emerging Markets Fund ETF (EEM) Covered Calls

Today is options expiration Friday for Nov2010. This afternoon, with the three iShares MSCI Emerging Markets Fund ETF (EEM) Nov2010 $46.00 calls in-the-money, the Covered Calls Advisor decided to roll-up-and-out to the Dec2010 expiration at the $47.00 strike price. The transactions history as well as a potential return-on-investment results are detailed below:

1. iShares MSCI Emerging Markets Fund ETF (EEM) -- Continuation Transaction
With iShares MSCI Emerging Markets Fund ETF (EEM) trading at $46.36, the three existing Nov2010 $46.00 calls were bought back for $.38 (only $.02 of time value remaining in each call option) and subsequently replaced by selling three Dec2010 $47.00 strike options at $1.02 as follows:
11/19/2010 Buy-to-Close (BTC) 3 EEM Nov2010 $46.00 Call Options @ $.38
11/19/2010 Sell-to-Open (STO) 3 EEM Dec2010 $47.00 Call Options @ $1.02
The price of EEM was $46.54 today when these call options were sold.

The transactions history is as follows:
10/27/2010 Bought 300 EEM @ $45.55
10/27/2010 Sold 3 EEM Nov2010 $46.00 Calls @ $.99
11/19/2010 Buy-to-Close (BTC) 3 EEM Nov2010 $46.00 Call Options @ $.38
11/19/2010 Sell-to-Open (STO) 3 EEM Dec2010 $47.00 Call Options @ $1.02

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: +$580.60
= (300*($.99+$1.02) - 2*$11.20 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EEM price unchanged at $46.54):
+$288.05 = ($46.54-$45.55)*300 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $47.00): +$426.05
= ($47.00-$45.55)*300 - $8.95 commissions

Total Net Profit(If stock price unchanged at $46.54): +$868.65
= (+$580.60 +$0.00 +$288.05)
Total Net Profit(If stock assigned at $47.00): +$1,006.65
= (+$580.60 +$0.00 +$426.05)

Absolute Return if Unchanged at $46.54: +6.4%
= +$868.65/$13,673.95
Annualized Return If Unchanged (ARIU): +44.6%
= (+$868.65/$13,673.95)*(365/52 days)

Absolute Return if Assigned at $47.00: +7.4%
= +$1,006.65/$13,673.95
Annualized Return If Assigned (ARIA): +51.7%
= (+$1,006.65/$13,673.95)*(365/52 days)

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