Math framing · Education
8% annualised does not mean 8% every year.
Before comparing, put stock price, tenor, and fees on the same calculation basis.
Choose the denominator first
This site uses stock market value on the option sale day—not historical cost basis or broker margin. That is a defined comparison scale, not strategy total return.
(Total Premium − sell fees) ÷ stock market value on trade day × 365 ÷ calendar days to expiry.
Example: stock US$200, Premium US$1.50, 30 days, ignore fees → period yield 0.75%, simple annualised ~9.13%. That does not mean you will earn 9.13% in a year.
What annualisation leaves out
It omits stock moves, dividends, future buyback cost, and taxes, and does not guarantee you can repeat similar terms after expiry. In a large decline, Premium each period can still leave total return negative.
ITM Call Premium may include intrinsic value—do not treat all of it as “extra profit.” When comparing trades, also weigh strike, tenor, assignment risk, and the stock itself.
Treat the calc as a check, not a forecast
Annualisation is a common scale—it alone should not decide a trade. Compounding tools are likewise math under fixed assumptions, not future market performance.
Try the Premium annualisation tool →
Annualised numbers are not forecasts
Converting 7- or 30-day Premium to an annual rate only helps compare capital use across trades. It does not mean the return repeats every period. Volatility, price, expiry, and liquidity change the next quote.
Higher annualised Premium often comes with larger underlying moves, nearer strikes, or event risk. Compare Delta, days to expiry, volume, open interest, and Bid-Ask Spread together.
Recalculate with three denominators
The same trade can use stock notional, cash collateral, or true maximum risk as denominator. Answers can differ completely—so “annualised return” without a stated denominator cannot be compared.
Spread costs · Break-even · Covered Call risks
Common calculation mistakes
Ignoring holding days
Use one method for days (e.g. expiry minus open). If you buy to close early, use actual holding period and realised Premium—not the original expiry assumption.
Ignoring trading costs
Commissions, platform fees, regulatory fees, and Bid-Ask Spreads reduce net income. When Premium is small or you close often, costs dominate.
Treating notional annualisation as portfolio return
Option Premium annualisation describes contract cash flow only—not stock P&L, capped upside, taxes, or idle cash. Judge the portfolio with full P&L versus a benchmark over the same period.
Further reading: SEC: Premium and options risk. Formula is this site’s simple annualisation definition, not a regulator-certified metric.
Verified: 9 October 2026. Examples are hypothetical and not personal advice.