Emerging Markets Covered Calls

by Mike Scanlin

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%

Mike Scanlin is the founder of Born To Sell and has been writing covered calls for a long time.

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