:: Step 1: Cost of Shares
| St 1:
$25.45 x 100 |
= |
$2,545 |
| St 2:
$22.50 x 100 |
= |
$2,250 |
|
St 3: $45.65 x 100 |
= |
$4,565 |
|
St 4: $17.00 x 100 |
= |
$1,700 |
| St 5:
$7.75 x 100 |
= |
$775 |
| St 6:
$50.53 x 100 |
= |
$5,053 |
|
| |
:: Step 2 Number of Contracts
| St 1:
$5,000 / $2,545 |
= |
1 |
| St 2:
$5,000 / $2,250 |
= |
2 |
|
St 3: $5,000 / $4,565 |
= |
1 |
|
St 4: $5,000 / $1,700 |
= |
2 |
| St 5:
$5,000 / $775 |
= |
6 |
| St 6:
$5,000 / $5,053 |
= |
0 |
|
| |
:: Step 3: Premium
| St 1:
$1.75 x 100 x 1 |
= |
$175.00 |
| St 2:
$1.20 x 100 x 2 |
= |
$240.00 |
|
St 3: $2.20 x 100 x 1 |
= |
$220.00 |
|
St 4: $0.75 x 100 x 2 |
= |
$150.00 |
| St 5:
$0.45 x 100 x 6 |
= |
$270.00 |
|
| |
:: Step 4: Exercise
| St 1:
Exercise? |
= |
No |
| St 2:
Exercise? |
= |
Yes |
|
St 3: Exercise? |
= |
No |
|
St 4: Exercise? |
= |
No |
| St 5:
Exercise? |
= |
Yes |
|
| |
:: Step 5: Share Profit/Loss
| St 1: (25.66-25.45)x100 |
= |
$21.00 |
| St 2: (22.50-22.50)x200 |
= |
$0.00 |
|
St 3: (40.42-45.65)x100 |
= |
$523 |
|
St 4: (16.86-17.00)x200 |
= |
$28.00 |
| St 5: (7.50-7.75)x600 |
= |
$150 |
|
| |
:: Step 6: Gross Profit/Loss
| St 1:
$175 + $21 |
= |
$196 |
| St 2:
$240 + $0.00 |
= |
$240 |
|
St 3: $220 + $523 |
= |
$303 |
|
St 4: $150 + $28 |
= |
$122 |
| St 5:
$270 + $150 |
= |
$120 |
|
Total |
= |
$375 |
|
| |
:: Step 7: Days Held
| St 1:
Apr-29 - Jun-17 |
= |
49 |
| St 2:
Apr-29 - Jun-17 |
= |
49 |
|
St 3: May-11 - Jun-17 |
= |
37 |
|
St 4: Apr-22 - Jun-17 |
= |
42 |
| St 5:
Apr-18 - Jun17 |
= |
60 |
|
| |
:: Step 8: Interest Rate
| St 1:
6.75% x (49/365) |
= |
0.91% |
| St 2:
6.75% x (49/365) |
= |
0.91% |
|
St 3: 6.75% x (37/365) |
= |
0.68% |
|
St 4: 6.75% x (42/365) |
= |
0.78% |
| St 5:
6.75% x (60/365) |
= |
1.11% |
|
| |
:: Step 9: Position Cost
| St 1:
($2,545 x 1) / 2 |
= |
$1,272 |
| St 2:
($2,250 x 2) / 2 |
= |
$2,250 |
|
St 3: ($4,565 x 1) / 2 |
= |
$2,282 |
|
St 4: ($1,700 x 2) / 2 |
= |
$1,700 |
| St 5: ($775 x 6) /
2 |
= |
$2,325 |
|
| |
:: Step 10: Interest Charged
| St 1:
$1,272 x 0.91% |
= |
$11.53 |
| St 2:
$2,250 x 0.91% |
= |
$20.39 |
|
St 3: $2,282 x 0.68% |
= |
$15.62 |
|
St 4: $1,700 x 0.78% |
= |
$13.20 |
| St 5:
$2,325 x 1.11% |
= |
$25.80 |
|
Total |
|
$86.54 |
|
| |
:: Step 11: Brokerage
| St 1:
$14.95 x 3 |
= |
$44.85 |
| St 2:
$14.95 x 4 |
= |
$59.80 |
|
St 3: $14.95 x 3 |
= |
$44.85 |
|
St 4: $14.95 x 3 |
= |
$44.85 |
| St 5:
$14.95 x 4 |
= |
$59.80 |
|
Total |
|
$254.15 |
|
| |
:: Step 12: Net Profit/Loss
|
Gross Profit: |
$375.00 |
| Interest: |
$86.54 |
| Brokerage: |
$254.15 |
| Subscription Fee: |
$105.00 |
| Net Loss: |
$70.69 |
|
| |
:: Step 13: ROI
| Net Loss: |
$70.69 |
| Bank: |
$50,000 |
| ROI: |
0.14% |
|
| |
|
To calculate the ROI for covered calls, you need to know:
-
The price of the stock at entry
-
The price of the stock at exit
-
The premium received for selling
the calls
-
The length of time the positions
were held
-
The interest charged on margin
-
Dividends received, if any (though
for the purpose of these calculations we shall ignore the effect
of dividends)
-
The dates the trades were entered
While the covered call is quite a
simple trade to execute, its profit and loss analysis is made more
complex because of the use of margin. More than likely, if you're
trading covered calls on an ongoing basis, you will be using the
margin available through your brokerage account to purchase the
underlying shares. If that is the case, you will be paying
interest on that money, which will have to be accounted for. In the
following analysis, we assume that you use margin for 50% of your
share purchases.
|
| |
As an example, suppose that you had
subscribed to a covered call service and were trading with a bank of
$50,000 while risking 5% per trade. Using your full 50% margin, this
will effectively give you $5,000 to allocate to each trade ($2,500
from your bank and $2,500 borrowed from your broker). The trades
from your advisor for the month were listed as follows:
|
| |
|
Stock |
Entry Date |
Entry Price |
Exit Date |
Exit Price |
Sold Option |
Premium |
|
LYO |
Apr-29 |
$25.45 |
Jun-17 |
$25.66 |
Jun 25 |
$1.75 |
|
COGT |
Apr-29 |
$22.50 |
Jun-17 |
$23.74 |
Jun 22.50 |
$1.20 |
|
APPX |
May-11 |
$45.65 |
Jun-17 |
$40.42 |
Jun-45 |
$2.20 |
|
EXM |
Apr-22 |
$17.00 |
Jun-17 |
$16.86 |
Jun 17.50 |
$0.75 |
|
PXLW |
May-17 |
$7.75 |
Jun-17 |
$9.04 |
Jun 7.50 |
$0.45 |
|
AVID |
Apr-18 |
$50.53 |
Jun-17 |
$58.77 |
Jun-50 |
$3.75 |
|
| |
:: Step 1: Cost of Shares
The first step in calculating your ROI is to establish the cost of purchasing the shares for each of the recommended trades. This is done by multiplying the entry price of the stock by 100 because, in order to sell 1 call option contract based on the underlying stock, you need to own 100 shares of that stock.
|
| |
:: Step 2: Number of Contracts
The next step is to calculate the the
number of option contracts you were able to sell of each underlying stock. To do this,
we divide your allocation per trade ($5,000) by the cost of
purchasing each lot of shares and
then round that number down to the nearest whole number. And as you can see from the results of the
calculations in Step 2, you would not have been able
to enter the last recommendation from your advisor.
|
| |
:: Step 3: Premium
Once we know how many contracts you were able
to sell, we can calculate your premium income. This is done, first by
multiplying the premium amount by 100 (because each option contract
represents 100 shares of the underlying) and then by multiplying that amount
by the number of contracts you wrote.
|
| |
:: Step 4: Exercise
The next step is to determine whether
or not any of your sold options were exercised, as this
will effect the profit (if any) from the shares. If you were exercised, your profit from any increase in the
share price will be limited to the difference between your
cost price and the strike price - on being exercised, you would have
had to sell your shares at the strike. The easiest way to determine
whether or not you would have been exercised is to look at the exit
price - if it's above the strike price you would have been, if it's
below you wouldn't. In the case of LYO, we'll
assume that you weren't
exercised because the small difference ($0.16) meant exercising the
option wouldn't have been worthwhile given the transaction costs
involved.
|
| |
:: Step 5: Share Profit/Loss
Now we can work out your profit or loss from the movement in the share price over the time you held the shares. This is done by subtracting the entry price from the exit price (if unexercised) or the entry price from the strike price (if exercised)
and the result multiplied by the number of shares held.
|
| |
:: Step 6: Gross Profit/Loss
Now that we know how much you made from the
share side of the trades, we can combine that with your premium income to establish your gross profit/loss.
|
| |
:: Step 7: Days Held
Now we need to calculate your costs, starting with the interest on the margin you used. As interest is charged according to how long the money was borrowed, we need to know the period of time that each position was held.
|
| |
:: Step 8: Interest Rate
We are going to use 6.75% per annum as our base
rate, as it is the maximum optionsXpress charges on accounts with balances
in excess of $50,000. To calculate the interest applicable to each position,
we multiply that rate by the days held converted to a fraction of a year.
|
| |
:: Step 9: Position Cost
Before we can actually work out your interest, we need to establish the amount of each
position that will be charged interest. As you only borrowed half of
it, this is 50% of the total
cost of each position.
|
| |
:: Step 10: Interest Charged
The interest charged by your brokerage firm can
now be calculated. This is done by multiplying the amount in Step 9 by the
interest rate in Step 8.
|
| |
:: Step 11: Brokerage
The second cost to be calculated is brokerage.
In the case of Covered Calls, brokerage is charged on both legs of the trade
on entry - the purchase of the shares (first leg) and the sale of the calls
(second leg). In each case, this is $29.90. On exiting the position,
brokerage would be charged on the sale of the shares and for those option
positions where you were exercised, but not for the option positions that
expired worthless.
|
| |
:: Step 12: Net Profit/Loss
Now we can work out your net profit/loss, which is your gross income
minus expenses (interest, brokerage and subscription fee).
|
| |
:: Step 13: ROI
We can now calculate your ROI for
the month. This is done by dividing your net return by your bank.
The result is a loss of 0.14%.
|
|
