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Saturday, October 26, 2013

Established iShares MSCI China ETF Covered Calls

Yesterday, a new covered calls position was established in iShares MSCI China ETF  (Ticker Symbol FXI).  This FXI position was established at the $36.00 strike price and with a Nov2013 expiration. As detailed below, this investment will provide a +1.5% absolute return in 23 days (which is equivalent to a +23.1% annualized return) if FXI closes at or above $36.00 at options expiration on Nov 15th.  The current Greek value of Delta for this option of 58.1% provides a good estimate of the probability that the stock price will be above the $36.00 strike price at Nov2013 options expiration. Thus, the resulting expected value of the annualized ROI for this investment is +13.4% = (+23.1%x 58.1%).

The details of the associated transactions and a potential return-on-investment result are as follows:

1. iShares MSCI China ETF (FXI)
The transactions were as follows:
10/25/2013 Bought 600 FXI shares @ $36.40
10/25/2013 Sold 6 FXI Nov2013 $36.00 Call Options @ $.95

A possible overall performance result (including commissions) for these iShares MSCI China ETF covered calls is as follows:
Stock Purchase Cost: $21,848.95
= ($36.40*600+$8.95 commission)

Net Profit:
(a) Options Income: +$566.55
= 600*$.95 - $13.45 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI assigned at $36.00) = -$248.95
= ($36.00-$36.40)*600 - $8.95 commissions

Total Net Profit (If FXI assigned at $36.00): +$317.60
= (+$566.55 +$0.00 -$248.95)

Absolute Return if Assigned (at $36.00): +1.5%
= +$317.60/$21,848.95
Annualized Return If Assigned (ARIA): +23.1%
= (+$317.60/$21,848.95)*(365/23 days)

The downside 'breakeven price' at expiration is at $35.45 ($36.40 - $.95), which is 2.6% below the current market price of $36.40.

The 'crossover price' at expiration is $37.35 ($36.40 + $.95). This is the price above which it would have been more profitable to simply buy-and-hold iShares MSCI China ETF until November 15th (the Nov2013 options expiration date) rather than establishing this covered calls position.