Established Covered Calls Position in iShares China Large-Cap ETF

Today, a Covered Calls position was established in iShares China Large-Cap ETF (ticker symbol FXI) with an April 20th, 2018 expiration at the $46.00 strike price. This ETF was purchased at $46.86 and the Call options sold at $1.79 per share.  The Implied Volatility of these Call options was 28.6 when this position was established.

As detailed below, a potential outcome is +2.1% absolute return in 23 days (equivalent to a +32.6% annualized return-on-investment) if the price of iShares China Large-Cap ETF shares remain above the $46.00 strike price at expiration.


1. iShares China Large-Cap ETF (PHM) -- New Covered Calls Position

The transactions were as follows:
03/29/2018 Bought 600 FXI shares @ $46.86
03/29/2018 Sold 6 FXI Apr 20, 2018 $46.00 Call options @ $1.79
Note: a simultaneous buy/write transaction was executed.

A possible overall performance result (including commissions) for this iShares China Covered Calls position is as follows:
Stock Purchase Cost: $26,942.97
= ($46.86 - $1.79) *600 shares +$8.97 commission

Net Profit Components:
(a) Options Income: +$1,074.00
= ($1.79*600 shares)
(b) Dividend Income: +$0.00

(c) Capital Appreciation (If FXI assigned at Apr 20, 2018 options expiration): -$520.95
=+($46.00-$46.86)*600 - $4.95 commissions

Total Net Profit (If FXI assigned at $46.00 at April 20th expiration): +$553.05

= (+$1,074.00 +$0.00 -$520.95)

Absolute Return (If FXI assigned at $46.00 on April 20th options expiration date): +2.1%

= +$553.05/$26,942.97

Annualized Return: +32.6%

= (+$553.05/$26,942.97)*(365/23 days)

The downside 'breakeven price' at expiration is at $45.07 ($46.86 - $1.79), which is 3.8% below the current market price of $46.86.  This is substantial downside protection given the potential annualized ROI for this investment.

Using the Black-Scholes Options Pricing Model, the probability of making a profit (if held until the April 20th, 2018 options expiration) for this iShares China Large-Cap ETF Covered Calls position is 61.3%, so the expected value annualized ROI of this investment (if held until expiration) is +20.0% (+32.6% * 61.3%), an attractive expected value result for this moderately in-the-money Covered Calls position.