There are numerous ways of calculating returns on options investments. And, there are two primary ways of calculating returns on covered calls. These include the trade’s flat return – assuming the stock is unchanged until expiration, and the if-called return – assuming that assignment takes place and the underlying stock is called away. The formula used to compute the flat CC return is to take the net call premium, which is the time value portion of the option’s premium, and divide it by the cost to put on the trade (net debit, which is stock price minus the option premium).
When doing this calculation, the return4refund question often arises as to which cost should be used. Should the calculation include the total price that was paid for the stock shares prior to receiving the covered call premium? Or, should the cost amount used be the net cost of the stock shares after deducting the amount of the call premium received? In order to solve this depends upon whether the option was in-the-money, out-of-the-money, or at-the-money when purchased. Therefore, for at-the-money and out-of-the-money calls, the net premium will be the total amount of the premium received. And, for in-the-money calls, only the time value portion of the premium should be used in the calculation.
It is also important to remember that in calculating returns, investors want to know their return, as well as their annualized return on their option trades. Therefore, once a return is calculated, the investor should then determine the holding period of the option in order to calculate the annualized return on the investment. For example, if an investor makes a 1 percent return during a 30 day option holding period, the annualized return is 12 percent. In calculating returns for annualized figures, divide the option’s return by the holding period. The holding period is measured in days. Then, multiply by the number of days in a year to determine the annualized return.
Mike Scanlin is the CEO of Born To Sell, a web site for covered calls. The site has a covered call screener, covered call portfolio management tools, and a covered call tutorial that discusses covered call returns in great detail.It is possible to submit an Amended Return to prevent added Debt on your Back Internal Revenue Service Taxes by using Form 1040X. Regardless if you filed your initial return and IRS Debt over the web or in writing, your Amended Return has to be done in writing. An Amended Return may be submitted inside 3 years of the original filing, as well as any time extensions. Always submit an Amended Return on Back Taxes when you realize a mistake. Remember that penalty fees and interest accrue on incorrect returns, so if the revenue office finds the mistake on your Back Internal Revenue Service Taxes before you do, you could have a bigger Tax Debt to repay.