Covered Call Return
A covered call position is a neutral-to-bullish investment strategy and consists of purchasing a stock and selling a call option against the stock. Two useful return calculations for covered calls are the %If Unchanged Return and the %If Assigned Return. The %If Unchanged Return calculation determines the potential return assuming a covered call position's stock price at option expiration is the same as at initial purchase. The %If Assigned Return calculation assumes the price of the stock is equal to or greater than the strike price of the sold call option. For in-the-money (see moneyness) covered calls, the calculations for %If Unchanged Return and the %If Assigned Return will be equal. Example calculations for %If Unchanged potential return and %If Assigned Return for covered calls are shown below:
Covered Call Cash Flow In-The-Money
| Activity | Cash Flow |
|---|---|
| Purchase XYZ Stock | $(51.00) |
| Sell call option XYZOPT strike price $50 | $ 3.00 |
| Assuming stock price is greater than $50 at expiration and stock is called away | $ 50.00 |
| ----------- | |
| Sum | $ 2.00 |
Covered Call %If Unchanged Potential Return Calculation
%If Unchanged Potential Return = Option premium / (Stock price - Option price)
%If Unchanged Potential Return = 2/(51-3) = 4.17%
%If Assigned Potential Return = (Option premium + Profit/loss on stock)/(Stock price - Option price)
%If Assigned Potential Return = (2 + 0)/(51-3) = 4.17%
Covered Call Cash Flow Out-Of-The-Money
| Activity | Cash Flow |
|---|---|
| Purchase XYZ Stock | $(49.00) |
| Sell call option XYZOPT strike price $50 | $ 2.00 |
| Assuming stock price greater than $50 at expiration and stock is called away | $ 50.00 |
| ----------- | |
| Sum | $ 3.00 |
%If Assigned Potential Return = (2 + 1)/(49-2) = 6.38%
Read more about this topic: Stock Option Return
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