Calculating A Return Many covered call investors get confused when it comes to calculating gains and losses on their covered call plays. Calculating your “true” return is important not just for investment purposes but also for tax purposes. The following will explain how to calculate returns on simple, as well as complex transactions.
To calculate the gain or loss, the formula is FINAL SALE PRICE – BASIS. "Final Sale Price" is the price you actually sold the stock. Basis is your breakeven point or your actual cost of the stock. Basis is important for calculations as transactions become more complicated.
Simple Transaction Examples:
At The Money
- You purchased 1000 shares of ABC Corp. at $50 a share and sold a $50 call for $5. Your basis (breakeven point) is now $45 ($50-$5).
- You are called out on the strike day and sell the stock for $50.
- Your gain is $5 ($50-$45) per share or $5000 ($5x1000 shares). Your percentage gain on the transaction is 10% ($5,000/$50,000).
InThe Money
- You purchased 1000 shares of ABC Corp. at $52 a share and sold a $50 call for $6. Your basis (breakeven point) is now $46 ($52-$6).
- You are called out on the strike day and sell the stock for $50.
- Your gain is $4 ($50-$46) per share or $4000 ($4x1000 shares). Your percentage gain on the transaction is 7.69% ($4,000/$52,000).
Out The Money
- You purchased 1000 shares of ABC Corp. at $48 a share and sold a $50 call for $4. Your basis (breakeven point) is now $44 ($48-$4).
- You are called out on the strike day and sell the stock for $50.
- Your gain is $6 ($50-$44) per share or $6000 ($6x1000 shares). Your percentage gain on the transaction is 12.5% ($6,000/$48,000).
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- Introduction
- Definition
- Understanding Options
- Key Terms
- The Basic Concept
- The Simplified Covered Call Process
- Benefits of Covered Call Writing
- Risks of Covered Call Writing
- Calculating A Return
- Getting Started
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