Calculating Covered Call Returns

There are several types of profit calculations used when calculating covered call returns.

Return If Flat is the return % if the stock price remains unchanged (flat) between now and option expiration. It equals the time premium divided by the net debit.

Return If Called is the return % if the option is exercised and the stock is called away. It equals the difference bewteen the strike price and the net debit, divided by the net debit.

Example: You buy 100 shares of stock at $39 and sell an OTM option with a strike of 40 for $2/share. Net debit is $37 (39 - 2) so your account is debited for $3700.

If the stock stays flat (it's $39 on expiration day), your account is worth $3900 (you have 100 shares of a $39 stock) and you had invested $3700 at the beginning, so the return is the time premium divided by the net debit: 2 / 37.

If the option is exercised you receive the strike price in cash (40), so the return is what you got minus what you invested, divided by the amount you invested: (40 - 37) / 37.

Stock Price Call Strike Call Bid Net Debit Return If Flat Return If Called
39.00 40
OTM 1 point
2.00 37.00
39.00 - 2.00
5.4%
2.00 / 37.00
8.1%
(40 - 37.00) / 37.00

Annualized Returns

In order to fairly compare covered call returns where the options have a different number of days until expiration, investors use Annualized Return:

Annualized Return If Flat is the annualized version of Return If Flat.

Annualized Return If Called is the annualized version of Return If Called.

To convert from Return to Annualized Return you need to know the holding period. For example, if you make 1% in 30 days, that would be about 12%/year. Divide the Return by the holding period (measured in days) and then multiply by the number of days in a year (365). Compare the same investment for 3 different holding periods:

Return
If Flat
Return
If Called
Days
Held
Annualized
Return If Flat
Annualized
Return If Called
5.4% 8.1% 17 116%
5.4 / 17 * 365
174%
8.1 / 17 * 365
5.4% 8.1% 30 65.7%
5.4 / 30 * 365
98.6%
8.1 / 30 * 365
5.4% 8.1% 65 30.3%
5.4 / 65 * 365
45.5%
8.1 / 65 * 365

All of our tables allow you to show or hide these 4 kinds of covered call returns, although many people prefer to just look at Annualized Return If Flat and hide the others.

Previous | Next