Monday, July 18, 2011

Establish iShares MSCI South Korea ETF Covered Calls

The prior covered calls position in EWY with a Jul2011 expiration was called in-the-money upon options expiration last Friday and was therefore assigned. Today, the Covered Calls Advisor decided to re-establish a new covered calls position in iShares MSCI South Korea ETF (EWY) with an Aug2011 expiration as follows:

Established iShares MSCI South Korea ETF (EWY) Covered Calls for Aug2011:
07/18/2011 Bought 500 EWY @ $64.76
07/18/2011 Sold 5 EWY Aug2011 $66.00 Calls @ $1.45
Note: The price of EWY was $64.80 when the options were sold.

EWY remains a good investment vehicle for capturing widespread exposure to the diversified South Korean economy and its stock market through a single equity. South Korea is a good value-oriented investment since some traditional value metrics such as P/E and P/Book are significantly less than those of the U.S., while the expectation for GDP growth with relatively modest inflation for 2011 also favors South Korea. In addition, South Korea currently ranks 4th in the Covered Calls Advisor's Country Value Rankings.

Some possible overall performance results(including commissions) for the EWY transactions would be as follows:
Stock Purchase Cost: $32,388.95
= ($64.76*500+$8.95 commission)

Net Profit:
(a) Options Income: +$712.30
= (500*$1.45 - $12.70 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If equity price unchanged at $64.76):
-$8.95 = ($64.76-$64.76)*500 - $8.95 commissions
(c) Capital Appreciation (If assigned at $66.00): +$611.05
= ($66.00-$64.76)*500 - $8.95 commissions

Total Net Profit(If equity price unchanged at $64.76): +$703.35
= (+$712.30 +$0.00 -$8.95)
Total Net Profit(If ETF price assigned at $66.00): +$1,323.35
= (+$712.30 +$0.00 +$611.05)

Absolute Return if Unchanged at $64.76: +2.2%
= +$703.35/$32,388.95
Annualized Return If Unchanged (ARIU) +24.0%
= (+$703.35/$32,388.95)*(365/33 days)

Absolute Return if Assigned at $66.00: +4.1%
= +$1,323.35/$32,388.95
Annualized Return If Assigned (ARIA) +45.2%
= (+$1,323.35/$32,388.95)*(365/33 days)