Covered Call Annualized Return
Calculates the simple-annualized rate of return from premium income on selling a covered call, assuming the option expires worthless. Uses the strike price as the capital basis — a close proxy for an at-the-money call where strike approximates current stock price.
When to use: Use when sizing income from covered-call overwriting — comparing premium yield to the value of stock collateral, scaled to an annual rate. For deep in- or out-of-the-money calls, substitute the actual stock cost basis for a tighter return-on-capital read.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| IRR | Annualized Return | Simple-annualized return assuming the option expires worthless | % |
| 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 (expiring May 29, 2026) on a stock at a $200 strike for $3.00 of premium per share.
Given
Step-by-Step
A 1.5% premium collected on stock pinned for 30 days annualizes to roughly 18%, ignoring any change in the underlying.
Example 2: 90-Day OTM Call on a $75 Strike
On April 29, 2026 you sell a 90-day covered call expiring July 28, 2026 on a $75-strike contract for $1.20 of premium.
Given
Step-by-Step
Longer-dated calls earn more premium per trade but the smaller 365/DTE multiplier means the annualized figure is lower. A 1.6% credit over 90 days is only 6.5% annualized.
Frequently Asked Questions
The two are very close for at-the-money calls, and the strike is the contractual reference price — convenient when you do not have current quote data handy. For deep ITM or OTM calls, the stock cost basis is a more accurate denominator: substitute it for Strike to compute return on actual capital tied up.
No — the formula isolates the premium-only return, the static or "if-not-called" yield. Total return on assignment also includes (Strike − Stock Cost Basis), which can be positive or negative depending on where you bought the shares.
Simple — Premium ÷ Strike × 365 ÷ DTE. It assumes you could roll the trade continuously at the same yield, which is a useful comparison metric but not a guaranteed forward return.
Stock-price moves, commissions and slippage, dividends paid while the stock is held, early assignment risk on dividend stocks, and the tax treatment of premium income.