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Tuesday, July 19, 2011

Establish iShares MSCI Taiwan ETF Covered Calls

Today, a new covered calls position was established in the iShares MSCI Taiwan ETF (EWT). This position was legged into since the 1,000 shares of EWT were purchased yesterday and the ten Aug2011 call options were sold today as follows:

Established iShares MSCI Taiwan ETF (EWT) Covered Calls for Aug2011:
07/18/2011 Bought 1,000 EWT @ $14.65
07/19/2011 Sold 10 EWT Aug2011 $15.00 Calls @ $.31
Note: The price of EWT was $14.85 today when the options were sold.

EWT currently ranks 3rd in the Covered Calls Advisor's Country Value Rankings. With this purchase, the Covered Calls Advisor Portfolio (CCAP) now holds positions in each of the Top 5 ranked countries in these rankings [China(1st), Hong Kong(2nd), Taiwan(3rd), South Korea(4th), and Germany (5th)]. This is the first time that EWT has been purchased in the CCAP, largely because the implied volatility (IV) did not previously meet this advisor's minimum threshold of being at least 20% above the IV of the S&P500. But with the decline in EWT prices during the past 5 weeks, EWT's associated IV has now increased to a point where it does meet that threshold requirement, so a covered calls position was established today.

Two possible overall performance results(including commissions) for the EWT transactions would be as follows:
Stock Purchase Cost: $14,650.95
= ($14.65*1,000+$8.95 commission)

Net Profit:
(a) Options Income: +$293.55
= (1,000*$.31 - $16.45 commissions)
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If assigned at $15.00): +$341.05
= ($15.00-$14.65)*1,000 - $8.95 commissions

Total Net Profit(If equity price unchanged at $14.65): +$284.60
= (+$293.55 +$0.00 -$8.95)
Total Net Profit(If ETF price assigned at $26.00): +$634.60
= (+$293.55 +$0.00 +$341.05)

Absolute Return if Unchanged at $14.65: +1.9%
= +$284.60/$14,650.95
Annualized Return If Unchanged (ARIU) +22.2%
= (+$284.60/$14,650.95)*(365/32 days)

Absolute Return if Assigned at $15.00: +4.3%
= +$634.60/$14,650.95
Annualized Return If Assigned (ARIA) +49.4%
= (+$634.60/$14,650.95)*(365/32 days)

The downside breakeven price at expiration is at $14.34 ($14.65 - $.31).
Using the Black-Scholes Options Pricing Model in the Schwab Hypothetical Options Pricing calculator, the resulting probability of making a profit (if held until Aug2011 options expiration) for this iShares MSCI Taiwan ETF (EWT) covered calls position is 64.9%. This compares with a probability of profit of 51.2% for a buy-and-hold of iShares MSCI Taiwan ETF (EWT) over the same time period.

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