# Calculating profits on a covered call. What method do you use?

Hey guys. I was having a discussion with someone about calculating profits on covered calls and I thought I'd ask the community's advice on which way is correct.

``````- 100 shares of XYZ at \$7.75 a share (\$775.00 invested)
- I then sell a call at the \$8.00 strike for a premium of .50 (Collect \$50.00)
- The offset now brings my cost per share down to \$7.25 a share.
- The person who bought the call won't call me away until the stock reaches \$8.50 (He already paid .50 already so it's not worth his while to call me away right at \$8.00)
- XYZ Stock reaches \$8.50 a share (YAY!)
``````

My question is this.. is my profit the difference between...

\$7.25 and \$8.50

``````  OR
``````

\$7.25 and \$8.00 ?

The only reason I ask is because it seems that counting the .50 premium in the offset and then in the \$8.50 might be double dipping.

How do you calculate profits on a covered call? Janie

(Contrary to the warning above I don't think this is a subjective question. Others probably want to know this)

• Why are you happy when the stock reaches 8.50? When you are selling covered calls, you should be happy when the stock stays flat or goes down, not up. Commented Oct 20, 2014 at 21:54

yes, you are double counting. Your profit is between (\$7.25 and \$8) OR (\$7.75 and \$8.50).

in other words, you bought the stock at \$7.75 and sold at \$8.00 and made \$0.50 on top.

Profit = \$8.00-\$7.75+\$0.50

(of course all this assumes that the stock is at or above \$8.00 when the option expires. If it's below, then your profit = market price - \$7.75 + \$0.50

by the way the statement `won't call me away until the stock reaches \$8.50` is wrong. They already paid \$0.50 for the right to buy the stock at \$8.00. If the stock is \$8.01 on the day of expiration your options will be executed(automatically i believe).

## assuming call is exercised at 8.50, total profit is \$120.00:

• paid: -775.00 (7.75*100 shares)
• collected: 50.00 (.50*10 calls)

at \$8.50:

• will collect: 765.00 (8.50*90)
• will collect: 80.00 (8.00*10)
• will pay*: -77.50 (7.75*10)

total profit = \$120.00

• total collected: 895.00
• total paid: -775.00

*basis of stock, not paid in cash, so not included in "total paid"

## if you hadn't sold the calls, profit would be \$75.00:

• paid: -775.00 (7.75*100)

at \$8.50:

• will collect: 850.00 (8.50*100)

total profit = \$75.00

• total collected: 850.00
• total paid: -775.00
• it's 1 option contract which is 100 shares, not 10. Commented Apr 14, 2011 at 4:04
• At 8.50, she does not collect anything when she sells the call. The stock gets called away at 8 and she loses all 100 shares. Commented Oct 20, 2014 at 21:58