When setting up a covered call trade, it is important to estimate ahead of time what that trade is likely to return. Not only will this allow you to evaluate the expected return on your current trade, but it will also give you a benchmark for comparing this trade with other opportunities that may be on your radar. I have set up a simple spreadsheet that allows me to input the necessary data to determine what a covered call setup will return if the position is called away at expiration. The sheet also tells me the amount of risk that… Read More
When setting up a covered call trade, it is important to estimate ahead of time what that trade is likely to return. Not only will this allow you to evaluate the expected return on your current trade, but it will also give you a benchmark for comparing this trade with other opportunities that may be on your radar. I have set up a simple spreadsheet that allows me to input the necessary data to determine what a covered call setup will return if the position is called away at expiration. The sheet also tells me the amount of risk that the covered call protects me against should the stock trade lower. Below is a screen shot of the spreadsheet, which can be easily replicated in Microsoft Excel. The blue cells represent numbers that are entered manually, and the white cells represent data calculated by the formulas. The first three cells are fairly clear. For a covered call setup, we will enter the market price of the stock, the strike price of the call option that we are selling, and the premium (or price) of the option. So, for the example above, we are interested in buying… Read More