Knowledge Base

Here is how we would calculate the % Downside protection or % Not Assigned value for Covered Calls:

% Downside Protection = Call Premium Income ÷ [Stock BID Price]

E.g. BTO XYZ (Stock) @ $25.30 and STO XYZAB (Call) @ $1.20

% Downside Protection = $1.20 ÷ [$25.30]
% Downside Protection = 4.74%

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.