Tuesday, December 2, 2014

Established Cash-Secured Puts Position in iShares MSCI Germany ETF

Today, 3 short Put options were sold in the iShares MSCI Germany ETF (Symbol EWG) for Dec2014 at the $29.00 strike price. This short-term bullish position was established for two primary reasons:
(1) the European markets should react positively if the expected monetary easing by the ECB takes place later this week; and
(2) Germany is ranked relatively high (6th of 22 countries) in the Covered Calls Advisor's current "Country Value Rankings": See http://coveredcallsadvisor.blogspot.com/2014/11/country-value-rankings.html

The details of the associated transaction and two potential return-on-investment results are presented below:

1. iShares MSCI Germany ETF (EWG) -- New Short 100% Cash-Secured Put Options Position
The transaction was as follows:
12/02/2014 Sold 3 iShares MSCI Germany ETF Dec2014 $29.00 Puts @ $.70
Note: The price of EWG was $28.57 when this transaction was executed.

The Covered Calls Advisor does not use margin, so the detailed information on this position and some potential results shown below reflect the fact that this position was established using 100% cash securitization for the three Put options sold.

A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $8,700.00
= $29.00*300
Note:  the price of EWG was $28.57 when these Put options were sold.

Net Profit:
(a) Options Income: +$198.80
= ($.70*300 shares) - $11.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If EWG remains at current $28.57 price at Dec2014 expiration): -$129.00
= ($28.57-$29.00)*300 shares; or
(c) Capital Appreciation (If EWG is above $29.00 strike price at Dec2014 expiration): +$0.00
= ($29.00-$29.00)*300 shares

1. Total Net Profit (If EWG remains at current $28.57 price at Dec2014 expiration):+$69.80 
= (+$198.80 +$0.00 -$129.00); or
2. Total Net Profit (If EWG is above $29.00 strike price at Dec2014 options expiration):+$198.80 
= (+$198.80 +$0.00 +$0.00)

1. Absolute Return (If EWG remains at current $28.57 price at Dec2014 expiration): +0.8%
= +$69.80/$8,700.00
Annualized Return: +15.4%
= (+$69.80/$8,700.00)*(365/19 days); or

2. Absolute Return (If EWG is above $29.00 strike price at Dec2014 options expiration): +2.3%
= +$198.80/$8,700.00
Annualized Return (If EWG above $29.00 at expiration): +43.9%
= (+$198.80/$8,700.00)*(365/19 days)

The downside 'breakeven price' at expiration is at $28.30 ($29.00 - $.70), which is 0.9% below the current market price of $28.57.
The 'crossover price' at expiration is $29.27 ($28.57 + $.70).  This is the price above which it would have been more profitable to simply buy-and-hold EWG until Dec 19th (the Dec2014 options expiration date) rather than selling these short Put options.