I'm trying to figure out the effective percentage return when I write ("sell to open") a stock call option.
I think I've figured it out for put options.
Consider this put example
- I think XYZ stock will stay above $40/share,
- It's 25 days until the the third Saturday (an options oddity),
- My broker charges $8/trade,
- I want to earn 20% effective return on my money, and
- It's an IRA--the money is tied up while the put is active.
So what what premium should I sell the put contract for? I calculate that one this way:
capital = $40 strike price * 100 shares/contract = $4000 premium = (capital * rate * fraction_of_year + fee) / shares = (4000 * 0.20 * 25/365 + 8) / 100 = $0.63
But my question is about call options
What value do I use for the "capital"?
I'm tempted to do the math exactly the same, but to use the current value of the underlying stock instead of the strike price.
But, you see, the money isn't sitting as cash in my brokerage account, as in the "put" case. I already own the underlying stock, so it's invested. If it's value rises above the strike price, I'll have to sell it. But if not, I'll have done no worse than I would have done without selling a call.
This might be an esoteric point, but I want to accurately calculate the return so I know what premium to charge for accurate comparison with the other ways I might choose to invest.