Unchanged Return on Investment

The unchanged ROI, when dealing with covered calls, is the return that one would achieve if the stock were to remain unchanged. This data is more of a barometer of the relationship to the premium to the stock, and can be useful when determining if the covered call should be sold. The unchanged ROI is calculated using the following formula:

Unchanged ROI = (Option_premium/cost

else

Unchanged ROI = (Option_premium + Option_Strike - Stock_purchase_price)/cost

Option_premium is the value received when selling the call.

Let's revisit our example of 100 shares of XYZ stock, with the $110 strike option selling for $5, and the $95 strike selling for $14.

The exercised ROI on the $110 strike option would be (110-(100-5))/(100-5) = (110-95)/95 = 15.8%. The rationale is that if one purchases the stock $100 and then sells the call for $5, the cost basis is now $95. The exercised ROI on the $95 strike option would be (14+95-100)/95 = 9.5%. The reason this formula is different is due to the fact that some value of the stock is lost because we sold a option with a strike lower than the purchase price. For example, since the short call has a strike of $95, this already reduces our value of the $100 stock by $5.