Covered Call Annualized Return
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
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.