emerging markets Oct 12, 2010 Emerging Markets Covered Calls

Much like gold, investors should always have at least some exposure to emerging markets for diversification. That is especially true considering the volatilities in the currency markets.

But how to research so many companies in so many emerging markets? Information can be inconsistent, hard to come by, and in a format that is difficult to digest. One easy way to achieve emerging markets exposure is to use an ETF (exchange traded fund).

The most popular emerging markets ETF is the iShares MSCI Emerging Markets Index Fund (EEM), which has nearly $40 billion in assets and has seen cash inflows of more than $3.5 billion so far this year. It is highly liquid, which is an attibute you want to see when investing in general, and specifically when writing covered calls.

If you want a very short term trade (4 days), there is still 28 cents of time premium left in the slightly out-of-the-money Oct 46s:

Symbol Stock Ask Expiration Call Strike Net Debit Annualized
Return If Flat
EEM 45.82 Oct 16 46 45.54 54.8%

But if you want to plan for the November option cycle, here are 3 choices, ranging from very conservative (for the 1%/month crowd), to more aggressive:

Symbol Stock Ask Expiration Call Strike Net Debit Annualized
Return If Flat
EEM 45.82 Nov 20 43 42.48 11.2%
EEM 45.82 Nov 20 44 43.23 16.8%
EEM 45.82 Nov 20 45 43.92 23.4%
EEM 45.82 Nov 20 46 44.51 28.1%

Another choice, if you want to limit your exposure to just China, would be to use iShares FTSE/Xinhua China 25 (FXI) instead. Here are a couple of potential in-the-money buy-writes if you'd like some time premium exposure to emerging China:

Symbol Stock Ask Expiration Call Strike Net Debit Annualized
Return If Flat
FXI 44.54 Oct 16 44 43.84 36.5%
FXI 44.54 Nov 20 43 42.29 15.9%
FXI 44.54 Nov 20 44 42.92 23.4%
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