Established Covered Calls Position in iShares China Large-Cap ETF

Today, a January 19th, 2018 Covered Calls position was established in iShares China Large-Cap ETF (ticker symbol FXI).  Given the Covered Calls Advisor's current Neutral market sentiment, a slightly in-the-money position (at the $43.00 strike price, 3.4% below the $44.52 stock price when the position was established).  

As detailed below, two potential return-on-investment results are:

• Early Assignment: A +0.7% absolute return in 13 days (equivalent to a +19.1% annualized return-on-investment); or
• Assignment at Expiration: A +2.2% absolute return in 44 days (equivalent to a +18.1% annualized return-on-investment)

Note: the Implied Volatility (IV) of the options at the time they were sold was 26.9 which exceeds the Covered Calls Advisor's minimum threshold of IV>20 and thus provides a sufficiently attractive potential return-on-investment for this relatively conservative position.  


iShares China Large-Cap ETF (FXI) -- New Covered Call Position

A semi-annual distribution will occur on December 20th.  The amount of the distribution has not yet been declared by BlackRock, but a current estimate of $.65 (the distribution was $.6892 last December) is included in the potential results analysis below.  Although unlikely, if the current time value (i.e. extrinsic value) of $.30 [$1.82 option premium - ($44.52 stock price - $43.00 strike price)] remaining in the short call option decays to approximately $.10 or less by December 19th (the day prior to the ex-distribution date), then there is a possibility that the Call options owner would exercise early and call FXI away to capture the distribution.


The transactions were:
12/07/2017 Bought 500 FXI shares @ $44.52
12/07/2017 Sold 5 FXI Jan 19th, 2018 $43.00 Call options @ $1.82
Note: a simultaneous buy/write transaction was executed.
12/20/2017 Upcoming FXI semi-annual distribution estimated at $.65 per share

Two possible overall performance results (including commissions) for this FXI Covered Calls position are as follows:
Covered Calls Purchase Cost Basis: $21,358.30
= ($44.52 - $1.82) *500 shares + $8.30 commissions

Net Profit Components:
(a) Options Income: +$910.00
= ($1.82*500 shares)
(b) Distribution Income (If Call options exercised early on business day prior to Dec 20th ex-distribution date): +$0.00; or
(b) Distribution Income (If FXI assigned at Jan 19th, 2018 expiration): +$325.00
= ($.65 distribution per share x 500 shares)

(c) Capital Appreciation (If FXI assigned early on Dec 19th): -$764.95
+($43.00-$44.52)*500 shares - $4.95 commissions; or
(c) Capital Appreciation (If FXI assigned at $43.00 at Jan 19th, 2018 expiration): -$764.95
+($43.00-$44.52)*500 shares - $4.95 commissions

Total Net Profit (If option exercised on day prior to Dec 20 ex-distribution date): +$145.05

= (+$910.00 +$0.00 -$764.95); or

Total Net Profit (If FXI assigned at $43.00 at Jan 19th, 2018 expiration): +$470.05

= (+$910.00 +$325.00 -$764.95)

1. Absolute Return [If options exercised on Dec 19th (business day prior to ex-distribution date)]: +0.7%

= +$145.05/$21,358.30

Annualized Return (If option exercised early): +19.1%

= (+$145.05/$21,358.30)*(365/13 days); OR

2. Absolute Return (If FXI assigned at $43.00 at Jan 19th, 2018 expiration): +2.2%

= +$470.05/$21,358.30

Annualized Return: +18.1%

= (+$470.05/$21,358.30)*(365/44 days)

In this instance, early assignment provides a slightly higher annualized return, so this is the Covered Calls Advisor's preferred outcome; but either outcome would provide an attractive return-on-investment result for this investment.  These returns will be achieved if FXI is above the $43.00 strike price at the January 19th, 2018 expiration.  If the stock declines below the strike price, the breakeven price of $42.05 ($44.52 -$1.82 - $.65) provides a 5.5% downside protection below today's purchase price.