PowerOptions Tutorial Page 2...

In a Constant Price Stock Market... A typical situation might be:

You would receive a Premium Income of $180 ($1.80 X 100) for every 1 contract you sell.
Here is how you would calculate the % Return if Assigned:

% if Assigned = Option Income - ((Stock - Strike) * 100) ÷ [Buy price of shares - Option Income]
% if Assigned = $180 - (($30.88 - 30) * 100) ÷ [$3088 - $180]
% if Assigned = $180 - (88) ÷ [$3088 - $180]
% if Assigned = $92 ÷ [$2908]
% if Assigned = 3.2% (if the stock price stays above 30 on 9/16, the expiration day)

This trade also offers a 6% Downside Protection. The Downside Protection shows you how far the stock can drop before you are technically losing money on the position. Here is how you would calculate the Downside Protection:

Downside Protection = Option Income ÷ Stock Price
Downside Protection = $1.80 ÷ $30.88
Downside Protection = 6%

Within each of PowerOptions Tools the % if Assigned is calculated by subtracting the option income from the purchase price in the denominator. It also includes any appreciation or depreciation from the stock price to the strike price. The calculation assumes that no margin borrowing was used to purchase the stock. Assuming a 50% margin, twice as much stock can be purchased to generate twice the strategy yield. However, the use of margin increases the risk considerably in the event of a market down-turn. The maximum profit for this strategy is achieved if the stock is assigned (remains above the strike price at expiration).

If the stock price drops below the strike price at expiration, you continue to own your stock and it is not sold to the option holder. You retain the premium and a call can be written for the following month (called rolling out). Note: an option must be written each option period if you hope to realize annualized % returns.