Covered Call Yield Explained: Monthly Formula and Examples

Simply Explained:

The covered call yield lets you compare the premium received too the total value of the shares you hold and the time you must hold them.

Formula:

• Monthly covered call yield = (option premium ÷ stock value) × (30 ÷ days to expiration)

  • The 30 ÷ DTE part adjusts the yield for time. A 15-day option gets doubled to estimate a full month. A 60-day option gets cut in half to estimate one month.

Example 1:

Stock price: $100
Call premium: $1
Days to expiration: 15

($1 ÷ $100) × (30 ÷ 15)

0.01 × 2 = 0.02

2% per month

This mean if you can repeat this type of trade over the month you would get a 2% return.

Example 2 (Different Price):

Stock price: $120 (+$20)
Call premium: $1
Days to expiration: 15

($1 ÷ $120) × (30 ÷ 15)

0.0083 × 2 = 0.016

1.6% per month

If the price increases your return shrinks.

Example 3 (Different Time):

Stock price: $120
Call premium: $1
Days to expiration: 18 (+3)

($1 ÷ $120) × (30 ÷ 18)

0.0083 × 1.66 = 0.016

1.38% per month

If the time increases your return shrinks.