This is a more complicated question than you might think. Some issues needing to be addressed:
1. Do you include dividend income along with option premium?
2. What stock price value do you use? (Original cost, value at the time the short call is opened, or strike of the call.)
3. What about capital gains on stock? (Clearly, this should not be included, but realistically with one eye on the possibility of exercise, the option strike and expiration you pick is going to be influenced by this concern.)
It makes sense to apply specific names to the different ways of calculating return. And by the way, however it is calculated, comparisons are valid only if you also annualize that return (return divided by holding period, and then multiplied by 12 months). So # 1 above should be called total return; number 2 should be called return on basis, return on current value or return on strike. And for number 3, capital gains should not be added to option and/or dividend income, but should simply be calculated separately. It affects what you pick, but is not part of the return calculation on the option trade.
About this week’s Heavy Hitter
Michael C. Thomsett is a widely published options author, with six options books in print, published by John Wiley & Sons, FT Press, Amacom Books, and Traders Library. He blogs at FT Press and his website is www.MichaelThomsett.com.