Covered Call Compounded Annualized Return
Covered Call Compounded Annualized Return
Compounded-annualized return from premium income on a covered call, treating the per-trade yield as a periodic return that compounds end-to-end across the year. Always slightly higher than the simple form for the same inputs.
When to use: Use when you want a compounding-consistent comparison against CAGR, EAR, or other annualized return measures. Use the simple form when matching the convention used by most broker covered-call screeners.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| IRR | Compounded Annualized Return | Compounded-annualized return assuming the trade is repeated end-to-end at the same yield | % |
| Today | Today's Date | Date the option is sold (trade date) | date |
| Expiration | Expiration Date | Date the option contract expires | date |
| Premium | Premium per Share | Cash credit received per share for selling the option | $ |
| Strike | Strike Price | Exercise price of the option contract | $ |
Real-Life Examples
Example 1: 30-Day Call on a $200 Strike
On April 29, 2026 you sell a 30-day covered call at a $200 strike for $3.00 of premium per share.
Given
Step-by-Step
Compounded form gives 19.86% versus 18.25% simple — about 161 bps higher for this monthly trade.
Frequently Asked Questions
No. It is a strike-based premium-yield proxy. Stock price can fall even if the call expires worthless, so total position return can be negative.
Use stock value at the trade’s start for a current trade return, or clearly label historical basis as an income-on-cost measure. Strike is only a proxy when it approximates that stock value.
No. Simple annualization rescales one trade’s premium yield; compounded annualization additionally assumes repetition and reinvestment at the same yield. Neither captures the future path of stock losses or assignment.