I receive a lot of emails disagreeing with return calculation. Let me explain how I calculate return and income
I believe 3 calculations are important: Income, Net Investment (cost basis) and Return.
Using my current SPY DLS as the example: accountant activity just below.
Current market value of Leap = 42.68 (38412)
Current market value of SC = 1.41 (987)
Account Activity
Date Action Qty Symbol/Description Price Net Amount
04/15/2010 Sell To Open 7 SPY May10 121 Call $2.13 $1,480.39
04/15/2010 Buy To Close 7 SPY Apr10 120 Call $1.21 ($857.58)
04/12/2010 Sell To Open 7 SPY Apr10 120 Call $0.77 $523.96
04/12/2010 Buy To Close 9 SPY Apr10 114 Call $6.05 ($5,460.05)
04/12/2010 Sell To Close 1 SPY Dec12 80 Call $41.94 $4,178.97
03/09/2010 Sell To Open 9 SPY Apr10 114 Call $2.18 $1,946.92
03/09/2010 Buy To Open 10 SPY Dec12 80 Call $36.30 ($36,315.11)
INCOME:
This is an income strategy and my income is the sum of all the short call premiums I received. If the short call strike is ITM I do NOT count intrinsic value. For example: if the stock is at 120 and I sold a 119 call for 2.5 I would only use 1.5 as income.
Using my account above all short calls were OTM so adding all short call premiums would be my income:
1947 + 524 + 1480 = 3951
NET INVESTMENT:
Net investment is important for the calculation of my adjusted cost basis of my leaps which changes month to month.
Net investment is the sum of BTO long calls and BTC short calls minus STC long calls
Using my account above:
BTO leap = (36315)
BTC short calls = (5460) + (858)
STC leap = 4179
TOTALS = 38454 is the net investment. I currently have 9 contracts (900 shares)
Therefore, the adjusted cost basis of those leaps are: 38454/900 or 42.73
Remember the initial cost basis was 36.30
The current market value of the leap is 42.68.
RETURN: This is the one most emails ask about. This is real simple.
Take the current market value of the leap and short call and subtract the sum of all the trades.
Current market value of leap = 38412 less short call (987) = 37425
Sum all trades = 34503
Subtract the two = 2922
Therefore, the return is 2922
Divide by the sum of all trades 2922/34503 = 8.5%
Trade is 56 days so far so annualized is 8.5 * (365/56) = 55.4%
The short call is out of the money and the entire 987 is time value which will come to me at expiration. Therefore the return at expiration should be 2922 + 987 = 3909
3909/34503 = 11.3% (73.8%)
Remember income is not the same as return. Return may be higher or lower because return factors in gain or loss in value of the leap. Income is strictly the spendable cash I receive.
drjoe
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