Saturday, December 17, 2011 EST

This post is in regards to how the ROI is calculated on options in the option search feature. 

These calculations are based on returns if assignment does not take place.  

Example (Put Credit Spread): Let's say you sell a Credit Spread for $25 and your MAX Risk is $100.  ROI is this case is based on the money at risk.  If the option expires worthless you keep the $25 which would be a 25% return on risk capital

Terms & Figures used in the calculation

ROI: Return on Investment
Stock Price: The closing price
Strike Price: The strike is based on the last bid price. This assumes this is what you would have to sell at just before the market closed. It is not based on the last price.
Premium: This is the premium for the selling the option. There is an additional step to adjust the premium for In the money (ITM) options (see below).

Note: For Naked Puts and Covered Calls we will show an example for calculating the ROI on in the money (ITM) options since there is an extra step to adjust the premium. This is done since selling ITM options assumes you will be assigned and the option will not expire worthless.

I. Naked Puts

A. In the Money: The premium gets adjusted down to match the stock price if assignment takes place.

a. Premium = (Premium – (Strike Price – Stock Price)
b. ROI = (Premium / Stock Price) * 100  ~ Use Stock Price this is where ITM will be assigned

Example (ITM) GE Option (Expiration 3/17/2012)
Stock Price: 17.01
Strike Price: 18.00
Premium/Bid: 1.74
ROI: 4.41%

Sample Calculation:
Premium = (1.74 – (18.00 – 17.01))
Adjusted Premium = .75
ROI = (.75 / 17.01) * 100  
ROI = 4.41%

B. Out of the money: ROI = (Premium / Strike Price) * 100 (no example simple calculation)

II. Covered Calls

A. In the Money: The premium gets adjusted down to match the stock price if assignment takes place.

a. Premium = (Premium – (Stock Price – Strike Price)
b. ROI = (Premium / Strike Price) * 100 ~ Use Strike this is where ITM will be assigned


Example (ITM) GE Option (Expiration 3/17/2012)
Stock Price: 17.01
Strike Price: 16.00
Premium/Bid: 1.41
ROI:  2.5%

Sample Calculation:
Premium = (1.41 – (17.01 – 16.00))
Adjusted Premium = .40
ROI = (.40 / 16.00) * 100  
ROI = 2.5%

B. Out of the Money: ROI = (Premium / Stock Price) * 100 (no example simple calculation)

 
Loading...