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  • Calculating Realized Option & Unrealized Stock Covered Call Returns at the End of a Contract Cycle – January 30, 2023

    Accurately calculating our covered call writing returns at the end of each contract cycle can be uncomplicated in some situations and more challenging in others. If we buy a stock at $48.00 and sell the $50.00 call at $1.50 and we allow exercise of an ITM strike (shares sold at $50.00 for a $2.00 per-share profit), we have a net gain of $3.50 per-share ($1.50 + $2.00). This represents a realized return of 7.29% ($3.50/$48.00). Easy.

    This article will analyze a scenario where the option expires out-of-the-money and exercise does not occur. I will use a real-life example with United Therapeutics Corp. (Nasdaq: UTHR) taken from Chapter 4 of my book, The Blue Collar Investor’s Guide to: Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts.

    UTHR covered call trades

    • 2/22/2021: Buy 100 x UTHR at $155.90
    • 2/22/2021: STO 1 x 3/21/2021 $160.00 (OTM) call at $3.50
    • 3/21/2021: UTHR trading at $158.25 (leaving the $160.00 strike OTM at expiration)
    • 3/21/2021: The $160.00 covered call option expires worthless, and shares are retained at $158.25

    Initial trade entries and calculations with the BCI Trade Management Calculator

    The spreadsheet shows an initial option time-value return of 2.25% (red arrow), 29.27% annualized based on a 28-day trade, with an additional 2.63% of upside potential if share price rises to or beyond the $160.00 strike.

    Final calculations with the BCI Trade Management Calculator

    Note the following:

    • The final realized options return is 2.25% (red arrow), the same as the initial option returns
    • The final (as of contract expiration) unrealized stock return is 1.51% (green arrow), less than the original maximum upside potential of 2.63% had UTHR appreciated to or beyond the $160.00 strike)
    • This nets a final total (realized + unrealized) return of $585.00 per-contract or 3.75% for the 28-day trade (brown cells)

    Discussion

    When calculating our final covered call writing returns at the end of a contract cycle and the underlying shares are retained, there will be a combination of realized option returns + unrealized stock returns (gain or loss). In this example, if UTHR closed below the original purchase price of $155.90, there would be an unrealized loss on the stock side and a net gain or loss depending on the amount of share decline.

    Author: Alan Ellman

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