A covered call that pays $1.50 on a $100 stock sounds like 1.5%. A cash-secured put that pays $2.00 on a $95 strike sounds like 2.1%. But one expires in 30 days and the other in 45, so which one is actually the better use of your capital? Annualizing the return puts every trade on the same clock so you can compare them. It also makes it easy to fool yourself, which is why this guide covers both the math and its limits.
If you would rather skip the arithmetic, the annualized return calculator does all of it for either strategy.
The formula
There are three steps.
1. Return per cycle is the net premium divided by the capital the trade ties up.
- Covered call: capital is the stock value, price × 100 per contract.
- Cash-secured put: capital is the cash you set aside, strike × 100 per contract.
Net premium means the premium you collect minus commissions and fees.
2. Simple annualized return scales that to a year:
annualized = return per cycle × 365 ÷ days to expiration
3. Compounded annualized return assumes you reinvest each cycle’s profit and repeat the identical trade:
compounded = (1 + return per cycle) ^ (365 ÷ days) − 1
The compounded figure is always higher, and it rests on an assumption that rarely holds: that you can find the same premium on the same terms every cycle. Use the simple figure to compare trades and treat the compounded one as a ceiling.
Worked example: covered call
You own 100 shares at $100. You sell a 30-day $105 call for $1.50 and pay no fees.
- Premium collected: $1.50 × 100 = $150
- Return per cycle (stock unchanged): $150 ÷ $10,000 = 1.50%
- Simple annualized: 1.50% × 365 ÷ 30 = 18.25%
- Compounded annualized: 1.015^(365 ÷ 30) − 1 = 19.86%
If the stock rises past $105 and your shares are called away, the return is higher because you also keep the gain up to the strike: ($105 − $100 + $1.50) ÷ $100 = 6.50% for the cycle. Annualized that is 79%, but it is a one-time event, because after the shares are gone there is no position left to repeat it with. That is why the “unchanged” figure is the one that describes an ongoing income strategy and the “called away” figure describes the best case for one trade.
Your breakeven is $100 − $1.50 = $98.50. Below that, the position loses money at expiration.
Worked example: cash-secured put
You sell a 30-day $95 put for $2.00 on a stock trading at $100, and set aside $9,500 in cash.
- Premium collected: $200
- Return per cycle (put expires worthless): $200 ÷ $9,500 = 2.11%
- Simple annualized: 2.11% × 365 ÷ 30 = 25.61%
- Compounded annualized: 1.0211^(365 ÷ 30) − 1 = 28.85%
- Cost basis if assigned: $95 − $2.00 = $93.00, which is 7% below the $100 starting price
The higher yield compared with the covered call is not free money. The put has a probability of being assigned that you are being paid for, and if the stock falls to zero your loss is $9,300 per contract. Annualized return measures what you are paid, not what you are risking.
The same premium means very different yields at different expirations
Suppose a trade pays exactly 1% of capital per cycle. Here is what that is worth over a year depending on how long the cycle lasts:
| Days to expiration | Return per cycle | Simple annualized |
|---|---|---|
| 7 | 1% | 52.1% |
| 14 | 1% | 26.1% |
| 30 | 1% | 12.2% |
| 45 | 1% | 8.1% |
| 60 | 1% | 6.1% |
| 90 | 1% | 4.1% |
This is the main reason annualized figures can mislead. A shorter expiration produces a bigger annualized number from the same premium, but in the real market a shorter option pays a smaller premium, so the table shows what the premium would have to be rather than what you will find on the chain. Use it as a sanity check: when a quoted yield looks high, look at how few days it is quoted over.
Weekly versus monthly
Take a $100 stock and compare two covered call approaches.
- Weekly: sell a 7-day call for $0.50, so 0.5% per cycle, or 26.1% annualized.
- Monthly: sell a 30-day call for $1.50, so 1.5% per cycle, or 18.25% annualized.
The weekly approach wins on paper. What the annualized figure does not show:
- More decisions and more assignment events. Over a year you place roughly four times as many trades, and each one is a chance to be assigned, to roll, or to make a mistake.
- More fees. The next section shows how much that matters.
- Less room to recover. A monthly call gives the stock a month to come back to your strike. A weekly call may be assigned or need rolling before it does.
- The pace usually does not hold. The weekly premium depends heavily on volatility that week. Annualizing it assumes every week looks the same.
Neither approach is right; the point is to know that the annualized figure is a pace, not a promise.
Fees matter more on small premiums
Say you pay $0.65 per contract to open and $0.65 to close or be assigned, $1.30 in total.
- On a $150 premium, fees take 0.9% of the premium. Net return per cycle goes from 1.500% to 1.487%, and the simple annualized return from 18.25% to 18.09%. Barely noticeable.
- On a $20 premium (a $0.20 option), the same $1.30 takes 6.5% of the premium.
Cheap, short-dated, far-out-of-the-money options are exactly where fees and wide bid-ask spreads eat a meaningful share of what you collect. Enter your fees in the calculator before you decide the trade is worth it.
Work backwards: the premium you need
Instead of asking what a trade yields, decide what you need and see whether the market will pay it.
premium needed per share = capital per share × target annualized return × days ÷ 365
For a $100 stock and a 15% annualized target:
- 30 days: $100 × 0.15 × 30 ÷ 365 = $1.23 per share
- 45 days: $100 × 0.15 × 45 ÷ 365 = $1.85 per share
If the strike you want pays less than that, the trade does not clear your bar and you can skip it without second-guessing. The calculator shows this figure automatically for whatever target you enter.
What annualized return leaves out
- Downside. A 25% annualized yield is no comfort if the stock drops 20%. Check your breakeven and your max loss alongside the yield. For the covered call math, see how to calculate covered call breakeven and return; for puts, cash-secured put return calculation.
- Assignment and opportunity cost. A covered call caps your upside. In a strong rally you earn the premium and watch the stock leave. A cash-secured put ties up cash that could be earning interest elsewhere.
- Repeatability. Premiums move with volatility. A great month is not a forecast of the next.
- Taxes. Option premiums are generally taxed differently depending on how each trade ends. Annualized figures here are before tax.
- In-the-money calls. If you sell a covered call below the stock price, part of the premium is intrinsic value you do not keep if you are called away. Use the called-away return, not the unchanged one.
Common mistakes
- Using the strike as capital for a covered call, or the stock price as capital for a cash-secured put. Use stock value for the call and strike × 100 for the put.
- Comparing annualized yields across very different risk levels. A 40% yield on a stock you would not want to own is not better than 15% on one you would.
- Treating the compounded number as the expected result.
- Ignoring fees on small premiums.
- Rolling or chasing to protect the yield. Annualized return is a reason to choose a trade, not a reason to avoid closing a bad one.
Frequently asked questions
What is a good annualized return for covered calls? There is no universal benchmark. Compare it with what the stock would be expected to return on its own and with what you could earn in lower-risk alternatives such as Treasury bills. A yield far above those usually means you are being paid to take on assignment or downside risk.
Should I use days to expiration or days I plan to hold? If you intend to hold to expiration, use days to expiration. If you plan to close early at, say, 50% of the maximum profit, use the days you expect that to take and half the premium. The calculator lets you try either.
Does the calculator include dividends? No. A stock that pays a dividend during the trade adds to a covered call’s return, and a dividend can also raise the risk of early assignment. See early assignment risk and dividends.
Ready to try numbers of your own? Open the annualized return calculator, then check how much of your account the position should take with the position size calculator.
Educational use only. Examples are hypothetical and ignore taxes, dividends, early assignment and slippage. This is not advice to buy or sell any security.