Static return vs if-called return

Static return is what you make if the stock sits exactly where it is: the premium, nothing else. If-called return is what you make if the stock finishes above your strike and the shares get sold: the premium plus the gain up to the strike. Every covered call has both numbers and they are rarely close.

Same trade as the rest of this cluster. 100 shares of KO at $71.40, April $75 call sold for $0.62, 41 days to run.

Static return

Assume KO closes at $71.40 on expiry day, exactly where it started. The call expires worthless, you keep the shares and the credit.

• Profit: $62
• On capital of $7,140: 0.87% over 41 days
• Annualized: 7.73%

This is the honest baseline yield of the position, and it is the number to use when you are asking "what does writing calls add to a portfolio I already own".

If-called return

Now assume KO closes at $76 and you are assigned. Shares go at $75.

• Share gain: ($75.00 minus $71.40) x 100 = $360
• Premium: $62
• Total: $422 on $7,140 = 5.91% over 41 days
• Annualized: 52.6%

Seven times the static return. Which is why, if you ever see a covered call screener advertising 50 percent annualized yields, check which number it is quoting before you get excited.

Neither one is the answer on its own

If-called return is not free money. It is contingent on the stock rising past your strike, which is exactly the scenario where you would have made more by not writing the call at all. At $76 the covered call made $422 and the plain shareholder made $460. At $85 the covered call still made $422 and the shareholder made $1,360.

So if-called return measures a good outcome for the strategy while simultaneously being the outcome where the strategy underperformed. That is genuinely confusing and it is why the two numbers get quoted selectively by people selling courses.

How to read them together

Think of them as the floor and the ceiling of the good cases.

• Static answers: what am I paid for the stock doing nothing. This is your yield.
• If-called answers: what is the most this position can make. This is your ceiling.
• The gap between them tells you how much of your return depends on the stock cooperating.

A big gap means you picked a strike well above the current price, so most of the potential return is share appreciation you may not get. A small gap means you wrote close to the money and are being paid mostly in premium. Neither is better. They are different trades and you should know which one you just placed.

The third number nobody quotes

Downside break-even. On this trade it is $70.78, meaning KO can fall 0.87 percent before the position is underwater relative to today. That is the whole cushion the premium bought you.

Static, if-called, break-even. Three numbers, and a covered call is not fully described by fewer. The covered call calculator shows all three at once for exactly this reason.

Questions people actually ask

Keep reading

• Annualizing a covered call correctly
• The payoff diagram and its three zones

Do the math on your own trade

• Covered call calculator premium, break-even, static and if-called return, annualized.
• Break-even calculator the price where the trade stops making money.
• Annualized return calculator turn any credit and any holding period into a yearly rate.

Every price in this article is an illustrative worked example, not a quote. Read Covered calls for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.