Today, the Covered Calls Advisor established a 100% cash-secured Puts position in iShares China Large-Cap ETF (Symbol FXI) by selling 7 Aug2015 Put options at the $39.00 strike price. This position indicates that the Covered Calls Advisor is willing to purchase FXI shares at $39.00 (for future covered calls investments) upon the market close on August 21st if the stock declines to below $39.00 at that time. This is a somewhat conservative investment since FXI was at $39.90 (2.2% above the strike price) when this position was established.
As detailed below, this investment will achieve a +1.7% absolute return in 19 days (which is equivalent to a +33.5% annualized return) if FXI remains above $39.00 at the August 21st options expiration date.
This transaction and the associated potential return-on-investment result is detailed below.
1. iShares China Large-Cap ETF (FXI) -- New Position
The transaction was as follows:
08/03/2015 Sold 7 iShares China Large-Cap ETF Aug2015 $39.00 Puts @ $.70
Note: The price of FXI was $39.90 when this transaction was executed.
Note: The Covered Calls Advisor does not use margin, so the detailed information on this position and a potential result shown below reflect the fact that this position was established using 100% cash securitization for the seven Put options sold.
A possible overall performance result (including commissions) for this transaction would be as follows:
100% Cash-Secured Cost Basis: $27,300.00
Note: the price of FXI was $39.90 when the Put options were sold.
(a) Options Income: +$475.80
= ($.70*700 shares) - $14.20 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If FXI is above $39.00 strike price at Aug2015 expiration): +$0.00
= ($39.00-$39.00)*700 shares
Total Net Profit (If FXI is above $39.00 strike price upon the Aug2015 options expiration): +$475.80
= (+$475.80 +$0.00 +$0.00)
Absolute Return (If FXI is above $39.00 strike price at Aug2015 options expiration): +1.7%
Annualized Return: +33.5%
= (+$475.80/$27,300.00)*(365/19 days)
The downside 'breakeven price' at expiration is at $38.30 ($39.00 - $.70), which is 4.1% below the current market price.
The 'crossover price' at expiration is $40.60 ($39.90 + $.70). This is the price above which it would have been more profitable to simply buy-and-hold FXI shares until August 21st (the Aug2015 options expiration date) rather than holding these short Put options.