Friday, January 28, 2011

Establish iShares MSCI Brazil Index ETF Covered Calls

A new covered calls position was established today in the Covered Calls Advisor Portfolio(CCAP) with the purchase of iShares MSCI Brazil Index ETF(EWZ) covered calls as follows:

Established iShares MSCI Brazil Index ETF(EWZ) Covered Calls for Feb2011:
01/28/2011 Bought 200 EWZ @ $72.119
01/28/2011 Sold 2 EWZ Feb2011 $73.00 Calls @ $1.45

Some possible overall performance results(including commissions) for the EWZ transactions would be as follows:
Stock Purchase Cost: $14,432.75
= ($72.119*200+$8.95 commission)

Net Profit:
(a) Options Income: +$279.55
= (200*$1.45 - $10.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EWZ price unchanged at $72.119):
-$8.95 = ($72.119-$72.119)*200 - $8.95 commissions
(c) Capital Appreciation (If exercised at $73.00): +$167.25
= ($73.00-$72.119)*200 - $8.95 commissions

Total Net Profit(If stock price unchanged at $72.119): +$270.60
= (+$279.55 +$0.00 -$8.95)
Total Net Profit(If stock price exercised at $73.00): +$446.80
= (+$279.55 +$0.00 +$167.25)

Absolute Return if Unchanged at $74.48: +1.9%
= +$270.60/$14,432.75
Annualized Return If Unchanged (ARIU): +31.1%
= (+$270.60/$14,432.75)*(365/22 days)

Absolute Return if Assigned at $73.00: +3.1%
= +$446.80/$14,432.75
Annualized Return If Assigned (ARIA): +51.4%
= (+$446.80/$14,432.75)*(365/22 days)

The downside breakeven price at expiration is at $70.669 ($72.119 - $1.45).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Feb2011 options expiration) for this iShares MSCI Brazil Index covered calls position is 62.0%. This compares with a probability of profit of 50.3% for a buy-and-hold of iShares MSCI Brazil Index ETF(EWZ) over the same time period.

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