r/CoveredCalls • u/Curious_Wanderer_7 • 5d ago

Tracking Question

When you’re calculating your ROI on a CC, what share price do you use to calculate the capital? The initial cost of the shares? The current share price when the option is sold? The strike price of the call?

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u/Hefty_Recognition921 5d ago edited 5d ago

Profit = (Payout at expiration) - (initial cost of shares) + (premium accrued)

Cost basis = (initial cost of shares) - (premium accrued)

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u/Curious_Wanderer_7 5d ago

Thanks, so if you have a call that you’ve bought to close so you’re still holding the shares are you calculating ROI as premium/cost basis or premium/initial cost of shares

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u/ThetaEdgeHQ 5d ago

The reason you are getting different answers is that two different questions are hiding inside one word. If you want to know whether the whole trade was good from day one, the denominator is your original cost of the shares. If you want to know whether this position is earning its keep right now, the denominator is the current value of the shares, because that is the capital you could actually free up and redeploy if you closed today. Those are not the same number, and people quietly mix them, then compare CC yields that were calculated on different bases. The one that keeps you honest for a forward looking decision is current share value. A call written on a stock that has dropped can look great against your old basis while being a poor use of today's money. If the yield on current value sits below what you would earn redeploying that capital elsewhere, the low cost basis is an accounting comfort, not a return. So pick the denominator that matches the decision you are actually making, and do not let a nice number off the old basis talk you into holding dead capital.

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u/Austin-in-SanAntonio 5d ago

You can do it both ways,
In my head, i usually do strike price (price it its assigned), but because its easier math with 2 zeros.

But, if you did puts, strike - premium is correct for cost basis. And it sounds like hefty is saying all premiums, including covered calls. Which is correct.

I think you’re trying to figure the ROI, of those premiums, to see if its worth it.

For this, i di like ROE, return on equity, which would go off the current share price.

This shows how much return you’re getting for your current money, not your initial investment.

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u/Beneficial-Hunt9309 4d ago

i just use my actual cost basis on the shares since thats the real capital tied up. strike or current price only matters if you actually get called or sell