I am establishing ongoing Covered Calls positions in iShares China Large-Cap ETF because of my now bullish outlook for China's stock market. Although the U.S. market (measured the S&P 500) has outperformed the iShares China Large-Cap ETF during the past dozen years, I believe this history is poised to begin to inflect to outperformance by China. China's economic growth is likely to exceed our U.S.GDP growth in upcoming years, and while our Federal Reserve continues its economic tightening policy, China has now initiated a stimulative monetary loosening strategy. Another reason for my contention about the two countries' respective stock markets going forward relates to stock price valuations. FXI's valuation metrics currently trade at only about one-half of that of the S&P 500: (1) a trailing twelve-months P/E of 9.0 for FXI versus 21.5 for SPY; and (2) a forward PEG Ratio of 1.0 for FXI compared to 2.0 for SPY. The overwhelming majority of my investments will continue to be in U.S.-based companies, but I believe now is a fortuitous time to include more international diversification in my Covered Calls Advisor Portfolio.
As detailed below, a potential return-on-investment result is +5.1% absolute return-on-investment (equivalent to +74.9% annualized return-on-investment for the 25 days holding period) if the stock price is in-the-money (i.e. above the $27.85 strike price) and therefore assigned on the July 14th, 2023 options expiration date.
iShares China Large-Cap ETF (FXI) -- Covered Calls Position Continued
The Buy/Write transaction was as follows:
6/20/2023 Bought 900 shares of iShares China Large-Cap ETF @ $27.87 per share
6/20/2023 Sold 9 FXI June 30th, 2023 $27.35 Call options @ $.86 per share
6/30/2023 Nine FXI Calls expired out-of-the-money so the 900 shares remained in the Covered Calls Advisor Portfolio.
07/3/2023 Continued this iShares China Large-Cap ETF Covered Calls position by selling 9 FXI July 14th, 2023 Call options at the $27.85 strike price for $.56 per share. The FXI share price was $27.84 when these Calls were sold and their Implied Volatility was 27.3.
A possible overall performance result (including commissions) for this iShares China Large-Cap ETF Covered Calls position is as follows:
FXI Covered Calls Net Investment: $24,315.03
= ($27.87 - $.86) * 900 shares + $6.03 commission
Net Profit Potential:
(a) Options Income: +$1,265.94
= ($.86 + $.56) * 900 shares - $12.06 commissions
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If 900 iShares China Large-Cap ETF shares assigned at $27.85 strike price at the July 14th options expiration date): -$18.00
+($27.85 - $27.87) * 900 shares
Potential Total Net Profit (If 900 iShares China Large-Cap ETF shares assigned at $27.85 strike price upon options expiration): +$1,247.94
= (+$1,265.94 options income +$0.00 dividend income -$18.00 capital appreciation)
Absolute Return-on-Investment Potential: +5.1%
= +$1,247.94/$24,315.03
Annualized Return-on-Investment Potential: +74.9%
= (+$1,247.94/$24,315.03) * (365/25 days)
