The Covered Call Calculator helps investors determine the potential profit, break-even point, and annualized return of a covered call option strategy. Input your trade details to analyze your maximum potential profit and risk profile.
Covered Call Calculator
Detailed Calculation Steps:
Covered Call Calculator Formula
The covered call strategy yields several key financial metrics, which are calculated using the following formulas:
1. Max Profit (MP) = (Strike Price ($\$K$) - Stock Price ($\$S_0$)) + Premium ($\$P$)
2. Break-Even Price (BEP) = Stock Price ($\$S_0$) - Premium ($\$P$)
3. Return on Capital (RoC) = Premium ($\$P$) / Stock Price ($\$S_0$)
4. Annualized Return (AR) = (Max Profit / Stock Price ($\$S_0$)) * (365 / Days to Expiration ($D$))
Formula Source: Investopedia, The Balance
Variables
The calculation relies on four primary inputs:
- Stock Purchase Price ($\$S_0$): The cost per share of the underlying stock when the covered call position was initiated.
- Call Strike Price ($\$K$): The price at which the buyer of the call option can purchase the stock from you.
- Call Premium Received ($\$P$): The cash received for selling the call option, expressed on a per-share basis.
- Days to Expiration ($D$): The number of days remaining until the option contract expires.
What is a Covered Call Calculator?
A Covered Call Calculator is a financial tool used by investors to analyze the potential outcomes of a covered call strategy. A covered call involves holding a long position in an asset (like 100 shares of a stock) and simultaneously selling (writing) a call option on that same asset. This calculator helps quantify the risk/reward profile of this popular income-generating strategy.
The primary benefit of selling a covered call is generating income (the premium) on stock you already own. However, this strategy also caps your potential upside profit at the strike price. The calculator is essential for comparing different strike prices and expiration dates to optimize the trade-off between premium received and capital appreciation forgone.
How to Calculate Covered Call Metrics (Example)
Let’s use an example to demonstrate the calculation steps:
- Start with Inputs: Stock Price ($\$S_0$) = \$100.00, Strike Price ($\$K$) = \$105.00, Premium ($\$P$) = \$3.00, Days to Expiration ($D$) = 60 days.
- Calculate Max Profit: Maximum profit is reached if the stock closes above the strike price. $MP = (\$105.00 – \$100.00) + \$3.00 = \$8.00$.
- Determine Break-Even Price: The BEP is the stock price at expiration where you neither gain nor lose money. $BEP = \$100.00 – \$3.00 = \$97.00$.
- Calculate Return on Capital: $RoC = \$3.00 / \$100.00 = 0.03$ or $3.00\%$.
- Calculate Annualized Return: $AR = (\$8.00 / \$100.00) * (365 / 60) \approx 0.4867$ or $48.67\%$.
Related Calculators
Explore other related option and investment analysis tools:
- Put/Call Ratio Calculator
- Option Delta Calculator
- Implied Volatility Calculator
- Cash-Secured Put Return Calculator
Frequently Asked Questions (FAQ)
The break-even price is the stock’s purchase price minus the premium received from selling the call option. This represents the price at which the investor will incur zero loss if the stock drops.
Is the maximum profit calculated per share or per contract?The calculator displays the maximum profit per share. Since one option contract typically covers 100 shares, you multiply the per-share profit by 100 to get the total profit for one contract/100 shares.
Why calculate the Annualized Return?Annualizing the return allows an investor to compare the performance of a short-duration covered call (e.g., 30 days) to other long-term investment strategies on a standard yearly basis. It is a powerful metric for assessing trade efficiency.
What is the main risk of a covered call?The main risk is that the stock price falls below the break-even price, leading to a loss on the stock ownership, although this loss is partially offset by the premium received.