Stock option return calculations provide investors with an easy metric for comparing stock option positions. For example, for two stock option positions which appear identical, the potential stock option return may be useful for determining which position has the highest relative potential return.
Covered call return
A covered call position is a neutral-to-bullish investment strategy and consists of purchasing a stock and selling a call option against the stock. Two useful return calculations for covered calls are the %If Unchanged Return and the %If Assigned Return. The %If Unchanged Return calculation determines the potential return assuming a covered call position's stock price at option expiration is the same as at initial purchase. The %If Assigned Return calculation assumes the price of the stock is equal to or greater than the strike price of the sold call option. For in-the-money (see moneyness) covered calls, the calculations for %If Unchanged Return and the %If Assigned Return will be equal. Example calculations for %If Unchanged potential return and %If Assigned Return for covered calls are shown below:
Covered Call Cash Flow In-The-Money
Covered Call %If Unchanged Potential Return Calculation
%If Unchanged Potential Return = Option premium / (Stock price - Option price)
%If Unchanged Potential Return = 2/(51-3) = 4.17%
%If Assigned Potential Return = (Option premium + Profit/loss on stock)/(Stock price - Option price)
%If Assigned Potential Return = (2 + 0)/(51-3) = 4.17%
Covered Call Cash Flow Out-Of-The-Money
%If Assigned Potential Return = (2 + 1)/(49-2) = 6.38%
Bull put credit spread return
The Bull Put Credit Spread (see bull spread) is a bullish strategy and consists of selling a put option and purchasing a put option for the same stock or index at differing strike prices for the same expiration. The purchased put option is entered at a strike price lower than the strike price of the sold put option. The return calculation for the Bull-Put Credit Spread position assuming price of the stock or index at expiration is greater than the sold put is shown below:
Bull Put Credit Spread Potential Return = (sold put price - purchased put price)/(sold put strike price - purchased put strike price - initial credit)
For example, suppose a put option with a strike price of $100 for ABC stock is sold at $1.00 and a put option for ABC with a strike price of $90 is purchased for $0.50, and at the option's expiration the price of the stock or index is greater than the short put strike price of $100, then the return generated for this position is:
ABC Bull Put Credit Spread Return = (1 - 0.5)/[100-90-(1-0.5)] = 5.26%.
Bear call credit spread return
The Bear Call Credit Spread (see bear spread) is a bearish strategy and consists of selling a call option and purchasing a call option for the same stock or index at differing strike prices for the same expiration. The purchased call option is entered at a strike price higher than the strike price of the sold call option. The return calculation for the Bear Call Credit Spread position assuming price of the stock or index at expiration is less than the sold call is shown below:
Bear Call Credit Spread Potential Return = (sold call price - purchased call price)/(purchased call strike price - sold call strike price - initial credit)
For example, suppose a call option with a strike price of $100 for DEF stock is sold at $1.00 and a call option for DEF with a strike price of $110 is purchased for $0.50, and at the option's expiration the price of the stock or index is less than the short call strike price of $100, then the return generated for this position is:
DEF Bear Call Credit Spread Return = (1 - 0.5)/[110-100-(1-0.5)] = 5.26%.
Iron condor return
The iron condor is a neutral strategy and consists of a combination of a bull put credit spread and a bear call credit spread (see above). Ideally, the margin for the Iron Condor is the maximum of the bull put and bear call spreads, but some brokers require a cumulative margin for the bull put and the bear call. The return calculation for the Iron Condor position using the maximum margin of the bull put credit spread and the bear call credit spread and assuming price of the stock or index at expiration is greater than the sold put option and less than the sold call option is shown below:
Iron Condor Potential Return = (bull put net credit + bear call net credit)/{ max[(purchased call strike price - sold call strike price), (sold put strike price - purchased put strike price)] - initial credits}