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Cash Grab: 3 Covered Calls on International Stocks

Earn income by selling covered calls against these conservative ETFs

Many investors are understandably nervous about investing in international stocks. Outside of some of the big famous names, mostly located in the U.K., trying to diligence a company in a foreign country can be challenging.

Cash Grab: 3 Covered Calls on International Stocks

Consequently, many investors including myself just drop funds into exchange-traded funds. The diversification across both geography and industry should provide the peace of mind one needs for this sector.

You can, however, also generate income by selling covered calls against ETFs that invest in international stocks. Covered calls allow you to sell the right for someone else to purchase a stock or ETF from you at a given price on or before a certain date. By selling calls on stocks or ETFs you own (hence “covered” calls), you therefore collect a premium for selling that right — so you have to either already own the stock or ETF, or buy it before making the trade.

If the ETF remains at or below that strike price, you keep the premium. If not, you are forced to sell the ETF for those international stocks, but nothing prevents you from buying back in at any time.

Here are three ways to generate cash via international stocks. In no particular order …

Covered Calls on International Stocks: iShares MSCI Emerging Markets ETF (EEM)

Covered Calls on International Stocks: iShares MSCI Emerging Markets ETF (EEM) The iShares MSCI Emerging Markets ETF (EEM) is a popular ETF for international stocks, as it gives exposure to emerging markets. Many of the top holdings are in Asian countries including China and Taiwan.

I would have expected a lot of volatility in EEM, but it basically went nowhere for about four years, and only this past year has it fallen pretty badly.

Still, it is at its lowest point since the financial crisis, so some investors may have chosen to buy in. This may be a good time to sell covered calls, if you believe as I do that we are headed into a global bear market.

EEM closed Wednesday at $31.82. The April $32 covered calls are selling for 88 cents, which is a 2.76% return if not called away, and 3.25% if it is called away. The latter is about 27% annualized.

Covered Calls on International Stocks: iShares MSCI ACWI ETF (ACWI)

Covered Calls on International Stocks: iShares MSCI ACWI ETF (ACWI)If you are going truly global, the iShares MSCI ACWI ETF (ACWI) is a truly global ETF with holdings across both developed and emerging markets, as well as having many of our own top names. ACWI is a pretty good way to get comprehensive geographical exposure across large- and mid-cap names.

ACWI performed pretty well over the past five years, but has recently sold off. If you are intent on holding it, now is a good time to sell covered calls. I would actually consider a longer-term covered calls strategy here because global markets could go either way in this environment.

With ACWI closing Wednesday at $53.82, consider selling the July $55 covered calls for $1.65. You pick up a 3.06% return if ACWI is not called away, and 5.26% if it is called away — about 14% annualized.

This is a modest play for a relatively safer ETF without much volatility.

Covered Calls on International Stocks: SPDR S&P International Dividend ETF (DWX)

Covered Calls on International Stocks: SPDR S&P International Dividend ETF (DWX)Another fairly conservative play in the international stocks arena is the SPDR S&P International Dividend ETF (DWX). This mirrors an index that takes the 100 highest-yielding dividend stocks in the S&P Global BMI. No U.S. stocks are included.

Obviously, you’d expect a fair number of utilities in DWX, and you wouldn’t be wrong. Its top holding is actually powerhouse National Grid (NGG).

DWX is a large-cap value play that yields a healthy 6.06%, and its beta is about 1.07, meaning it has about 7% more volatility than the S&P 500. Still, that does translate into modest premiums on covered calls.

DWX closed Wednesday at $32.82. Consider selling the June $33 covered calls for $1.10, which is a 3.3% return for a 107-day holding period, or 12% annualized.

One last tip: If you see your stock soar past the strike price, nothing stops you from just buying back the call or buying another lot of stock.

Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he did not hold a position in any of the aforementioned securities. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.


Article printed from InvestorPlace Media, https://investorplace.com/2016/03/3-covered-calls-on-international-stocks/.

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