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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Dan Duchardt who wrote (11377)8/19/1999 11:12:00 PM
From: KevinD   of 14162
 
Well, smoke has been coming out of my ears for a week thinking about this. I couldn't sleep. I couldn't eat. I couldn't work. It was terribly exhausting. Not really, I've just been busy:-)

Anyway, as Dan points out, there isn't double counting, it is either a discount to the cost or an addition to the gross return but not both. In either case the net profit is the same in real $$ but your ROI % is different because your denominator is different. The cost reduction method makes the ROI look better.

If you are making a decision regarding where you stand today versus where you will be in the future, then the cost reduction is the proper method for making that decision because if you sell the call today, you will have the premium today and that is your net cost today. It is an accurate calculation of ROI from today forward.

If you are trying to calculate your ROI on your overall play on a stock from beginning to end then the only truly correct method would be to use a discounted cashflow calculation to take in to account the time value of all of the money in and out of the play as it happened. Someone (sorry I forgot who and don't feel like looking back) suggested a function in MS-Excel that will do that for you but I have not used it yet.
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