The way I understand Macmillan is that what went on before should not be relevant in the current decision. So, the idea is that you are calculating ROI from now, the time you make the decision and sell the call, not from the time you bought the stock in the past. Whether you already own the stock or not, the ROI you are calculating is as if you were doing a Buy-Write today. If you are doing a Buy-Write today, your "I" is the net of the cost minus the premium. At any point in time, your "I" is your net investment which is cost minus premiums received plus premiums paid. Your possible future "R" is the appreciation (hopefully) up to the strike price of your current write position.
Your understanding of Macmillan seems reasonable enough, if you someday decide to write calls against a stock you have been holding a long time, or if you want to start the calculation of ROI fresh when one option expires and you write a new contract. However, if following the WINS approach leads you to legging into a position, buying the underlaying at a low and allowing time for the price on the stock and calls to rise before writing, then including the gain on the underlying in calculating the return on the position makes more sense (at least to me).
There is always difficulty calculating returns on investments where the costs or returns are spread over time. If you want high precision, you need to keep track of margin payment dates and amounts, as well as transaction dates, commissions, etc. For the precision most of us care about, it is reasonable to use the net stock cost to you, minus the net premium as the cost basis for the CC investment, even if those transactions are spread over a few days or even weeks, as long as that delay is short compared to the holding time. Then of course the return has to be adjusted to account for margin costs, if any. At best, any such calculation is an estimate.
For anyone interested in those last decimal places, the XIRR Excel function allows you to list all the amounts and corresponding dates and dutifully spits out a ROI. Suppose you buy a stock on margin, pay monthly interest, write a call against the stock at some point, and finally realize a return by actually, or hypothetically closing the position. Make two columns (A & B) with the costs (positive) and returns (negative) in the first column with corresponding dates in the second column. The last entry would be a real or hypothetical return, such as the strike price and date, less any amount to pay off the margin loan (could be 2 entries). Assuming 4 entries, enter the formula:
=XIRR(A1:A4,B1:B4,0.2)
in any available cell. (The 0.2 is just an estimate needed to start the iteration.) If you get nothing, you probably have to "Add-In" the Analysis Tool Pack. GOOD LUCK!! |
