How to Calculate Covered Call Return, From 1.5% to 18.25%

A covered call's return is the premium divided by the stock price, annualized by the days until expiration. Sell a one-month call for $1.20 on an $80 stock and you earn 1.5%, or 18.25% annualized. That figure assumes the stock stays below the strike, and it ignores any drop in the shares themselves.

The covered call return formula

A covered call means you own 100 shares and sell one call option against them. The buyer pays you a premium now. In exchange, you agree to sell your shares at the strike price if the stock is above it at expiration.

Four formulas cover almost every question about the trade. All figures are per share, and one contract covers 100 shares.

"Stock price" means what the shares are worth today, even if you bought them years ago for less. Using an old purchase price makes the return look bigger than the money at risk supports. If you paid $50 and the shares are now worth $80, selling the call puts $8,000 on the line, so $8,000 is the base.

For the premium, use the bid: the price a buyer is paying right now. The last traded price can be hours old, and the ask is what you would pay to buy the call, so neither is what you would collect.

A worked example on an $80 stock

Say you own 100 shares worth $80 each. You sell one $84 call that expires in 30 days and collect $1.20 a share, or $120.

• Return if flat: $1.20 ÷ $80 = 1.5%.
• Simple annualized: 1.5% × 365 ÷ 30 = 18.25%.
• Compounded annualized: (1 + 0.015) raised to the power 365 ÷ 30, minus 1, is 19.86%.
• Break-even: $80 − $1.20 = $78.80.

The simple rate is the one option sellers usually quote. The compounded rate assumes you roll the same 1.5% into the next trade every month, which the market rarely lets you do. Check your own strike and premium in the covered call calculator, which shows both rates and charts profit at every closing price.

How do you calculate a covered call's annualized return?

Multiply the trade's return by 365, then divide by the calendar days until expiration. Annualizing turns trades of different lengths into rates you can compare.

The table below prices three calls on the same $80 stock and $84 strike, with illustrative premiums for each expiration.

That weekly call pays the least in dollars and the most per year. To earn that 22.81%, though, you would need to sell about 52 of them in a row at the same price, with a commission and a decision every Friday.

What is the return if your shares are called away?

If the stock closes above $84, your shares sell at $84 and you keep the premium. Add the $4 gain up to the strike to the $1.20 premium:

($84 − $80 + $1.20) ÷ $80 = $5.20 ÷ $80 = 6.5%.

Over 30 days, that is 79.08% annualized. Treat that number with care. It assumes the stock rises 5% every month and that you can buy back in and repeat. The if-called return is the most the trade can earn, since any rise above $84 goes to the call buyer.

The Options Industry Council notes that a call can be assigned before expiration. That risk peaks when the call is well in the money and a sizable dividend is about to be paid. Early assignment ends the trade sooner, which raises the annualized figure but leaves you without the shares.

How do dividends and fees change the return?

Dividends you collect before expiration count as part of the return. A $0.30 dividend on the $80 stock lifts the flat return to 1.875% and the annualized return to 22.81%. It also lowers the break-even to $78.50.

Commissions come off the premium before you divide. At $0.65 per contract, the $120 premium nets $119.35, which is 1.49% for the month, or 18.15% annualized. On a single contract, that fee costs about a tenth of a percentage point a year. On weekly calls, the fee is paid 52 times.

Of the two, the dividend moves the result more. It also raises the chance of early assignment once the call is in the money.

What does the annualized number leave out?

None of these formulas include a falling stock. If the shares drop 10% to $72 by expiration, the call expires worthless and you keep the $120.

Meanwhile the shares lost $800, so the position is down $680, or 8.5%. Owning the stock with no call would have lost $800. The premium covered 1.5% of a 10% fall.

That is the trade-off of a covered call: a small, steady cushion on the downside and a hard cap on the upside. FINRA's investor guide to options puts it the same way, describing premium income alongside the risk of losing the shares' upside if the call is exercised.

Taxes change the after-tax return too. IRS Publication 550 says premium from a call that expires is a short-term capital gain. If the call is exercised, the premium is added to what you received for the shares, and the gain is long-term or short-term based on how long you held them.

Related math for covered call sellers

If the stock runs past your strike and you want to keep the shares, when to roll covered calls prices the choices. For the put side of the same trade, see cash-secured put vs. covered call, and for running both in a loop, the wheel strategy guide.

Sizing an income goal from these returns is covered in how much capital $1,000 a month of option income takes. The options income hub gathers every calculator. Enter your stock price, strike, premium, and days into the covered call calculator to see your break-even next to both annualized rates, like the $78.80 above.