Tuesday, April 19, 2011

Establish iShares MSCI Emerging Markets ETF and iShares MSCI South Korea ETF Covered Calls

Yesterday, with the Dow down over 200 points in reaction to the S&P warning on the U.S. debt rating, the Covered Calls Advisor purchased four equity positions with the idea of legging them into covered calls positions over the next couple of days when the market bounced back from its initial overreaction to the S&P news. The four equities purchased were 1,000 iShares MSCI China ETF (FXI), 500 iShares MSCI Emerging Markets ETF (EEM), 600 iShares MSCI South Korea ETF (EWY), and 300 shares of UnitedHealth Group Inc.(UNH).

Today, with equity prices rebounding from yesterday's sell-off, covered calls positions were established against the shares held in EEM and EWY. The transactions as well as some potential results are detailed below.

1. iShares MSCI Emerging Markets ETF (EEM)
The transactions were as follows:
04/18/2011 Bought 500 EEM @ $47.81
04/19/2011 Sold 5 EEM May2011 $49.00 Calls @ $.83
Note: the price of EEM was $48.32 when the calls were sold.

Two possible overall performance results(including commissions) for these iShares MSCI Emerging Markets ETF (EEM) transactions would be as follows:
Stock Purchase Cost: $23,913.95
= ($47.81*500+$8.95 commission)

Net Profit:
(a) Options Income: +$402.30
= (500*$.83 - $12.70 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $47.81 at expiration): -$8.95
= ($47.81-$47.81)*500 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $49.00): +$586.05
= ($49.00-$47.81)*500 - $8.95 commissions

Total Net Profit (If stock price unchanged at expiration): +$393.35
= (+$402.30 +$0.00 -$8.95)
Total Net Profit (If stock assigned at $49.00): +$988.35
= (+$402.30 +$0.00 +$586.05)

1. Absolute Return (If stock unchanged at $47.81 at expiration): +1.6%
= +$393.35/$23,913.95
Annualized Return (If stock unchanged at expiration): +18.2%
= (+$393.35/$23,913.95)*(365/33 days)

2. Absolute Return (If stock assigned at $49.00 at expiration): +4.1%
= +$988.35/$23,913.95
Annualized Return (If stock assigned at $49.00): +45.7%
= (+$988.35/$23,913.95)*(365/33 days)


2. iShares MSCI South Korea ETF (EWY)
The transactions were as follows:
04/18/2011 Bought 600 EWY @ $64.17
04/19/2011 Sold 6 EWY May2011 $66.00 Calls @ $1.39
Note: the price of EWY was $65.20 when the calls were sold.

Two possible overall performance results(including commissions) for these iShares MSCI South Korea ETF (EWY) transactions would be as follows:
Stock Purchase Cost: $38,510.95
= ($64.17*600+$8.95 commission)

Net Profit:
(a) Options Income: +$820.55
= (600*$1.39 - $13.45 commissions)
(b) Dividend Income: $0.00
(c) Capital Appreciation (If stock unchanged at $64.17 at expiration): -$8.95
= ($64.17-$64.17)*600 - $8.95 commissions
(c) Capital Appreciation (If stock assigned at $66.00): +$1,089.05
= ($66.00-$64.17)*600 - $8.95 commissions

Total Net Profit (If stock price unchanged at expiration): +$811.60
= (+$820.55 +$0.00 -$8.95)
Total Net Profit (If stock assigned at $66.00): +$1,909.60
= (+$820.55 +$0.00 +$1,089.05)

1. Absolute Return (If stock unchanged at $64.17 at expiration): +2.1%
= +$811.60/$38,510.95
Annualized Return (If stock unchanged at expiration): +23.3%
= (+$811.60/$38,510.95)*(365/33 days)

2. Absolute Return (If stock assigned at $66.00 at expiration): +5.0%
= +$1,909.60/$38,510.95
Annualized Return (If stock assigned at $66.00): +54.8%
= (+$1,909.60/$38,510.95)*(365/33 days)

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