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
$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)