Today, a covered calls position was established in iShares MSCI Emerging Markets ETF (ticker symbol EEM) with a Jan2016 expiration. This position includes consideration of an upcoming semi-annual distribution with an ex-date of Dec 21st. Given the Covered Calls Advisor's current Slightly Bearish overall market outlook, a conservative in-the-money covered call position was established (with the strike price of $32.00 being below the stock purchase price of $32.59).
As detailed below, two potential return-on-investment results for this position are:
If Distribution Capture: +2.9%
absolute return (equivalent to +27.0% annualized return over the next 39
days) if EEM is assigned at Jan2016 expiration on January 15th.
1. iShares MSCI Emerging Markets ETF (EEM) -- New Covered Calls Position
The estimated $.50 distribution of Dec 21st is included in the potential
results analysis below. Although unlikely, if the current time value
(i.e. extrinsic value) of $.50 [$1.09 option premium - ($32.59 purchase
price - $32.00 strike price)] remaining in the short call option decays
substantially by December 20th (the business day prior to the ex-date), then it is possible that the call options owner would exercise
early and call the EEM shares away to capture the dividend.
The transactions were:
12/08/2015 Bought 300 iShares MSCI Emerging Markets ETF shares @ $32.59
12/08/2015 Sold 3 EEM Jan2016 $32.00 Call options @ $1.09
Note: a simultaneous buy/write transaction was executed.
12/21/2015 Upcoming distribution estimated at $.50 per share
Two possible overall performance results (including commissions) for this EEM covered calls position are as follows:
Stock Purchase Cost: $9,784.95
= ($32.59*300+$7.95 commission)
(a) Options Income: +$316.80
= ($1.09*300 shares) - $10.20 commissions
(b) Distribution Income (If option exercised early on business day prior to Dec 21st ex-date): +$0.00; or
(b) Distribution Income (If EEM assigned at Jan2016 expiration): +$150.00
= ($.50 distribution per share x 300 shares)
Either outcome would provide a very attractive return-on-investment result for this investment. These returns will be achieved as long as the stock is above the $32.00 strike price at assignment. If EEM declines below the strike price, the breakeven price of $31.50 ($32.59 -$1.09) provides 3.3% downside protection below today's purchase price.