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Understanding Covered Return in thinkorswim

The documentation provides the formula for Covered Return:

$$\text{Covered Return} = \left( \frac{\text{Call Mark} - \text{In-the-Money Amount}}{\text{Stock Price}} \right) \times \left( \frac{365}{\text{Calendar Days to Expiration}} \right)$$

• Call Mark: The midpoint of the bid-ask spread for the call option (i.e., $\frac{\text{Bid} + \text{Ask}}{2}$).
• In-the-Money Amount: For an in-the-money (ITM) call, this is the difference between the stock price and the strike price ($\text{Stock Price} - \text{Strike Price}$). For out-of-the-money (OTM) or at-the-money (ATM) calls, this is 0 because the strike is equal to or above the stock price.
• Stock Price: The current price of the underlying stock.
• Calendar Days to Expiration: The number of days until the option expires (DTE).
• Result: The annualized percentage return from selling the call, assuming you own the underlying stock.

Key Implications

• For OTM or ATM Calls: If the call is OTM (strike > stock price) or ATM (strike = stock price), the In-the-Money Amount is 0, simplifying the formula to: $$\text{Covered Return} = \left( \frac{\text{Call Mark}}{\text{Stock Price}} \right) \times \left( \frac{365}{\text{DTE}} \right)$$ This matches the standard annualized return calculation for covered calls.
• For ITM Calls: If the call is ITM (strike < stock price), the In-the-Money Amount reduces the numerator, lowering the Covered Return because part of the premium is intrinsic value (not pure time value). Selling ITM calls limits your return but increases the likelihood of assignment.
• Your Goal: To achieve an 8% per-round return for 30-45 DTE, the Covered Return filter should target ~80% annualized, but you’ll focus on OTM or ATM calls to maximize premium while avoiding ITM calls’ lower returns.

Calculating the Required Covered Return

To achieve an 8% per-round return (i.e., $\frac{\text{Call Mark}}{\text{Stock Price}} \times 100 = 8\%$):

• For 30 DTE: $$\text{Covered Return} = 8\% \times \frac{365}{30} \approx 97.3\%$$
• For 45 DTE: $$\text{Covered Return} = 8\% \times \frac{365}{45} \approx 64.9\%$$