Annualized Return on an Option Premium: How It Is Calculated

Published Oct 26, 2026

An option premium on its own says little. The same premium can be a lot for a contract that expires soon on a low-priced stock and very little for one that runs for months on a high-priced stock. The annualized return puts premiums on one scale, so contracts with different strikes and expirations can be compared, and so a Monitor can ask for a minimum.

This article explains, step by step, how OpScout calculates it, and what the result does and does not tell you. The full method is in the Methodology, section 6.3.

Step 1: the price of the option, at the bid

An option has two quoted prices: the bid, the highest price a buyer is currently offering, and the ask, the lowest price a seller is currently asking. Someone selling an option, as in a covered call or a cash-secured put, would sell into the bid. So OpScout values the option at its bid, read from the data source for each contract a screen returns.

It does not use the screening service's own premium, option price or returns. A contract without a positive bid is left out.

Step 2: the capital

A return is a gain over the money it relates to. For an option seller, that money is:

• Covered Call: the stock price less the bid. The shares are the capital, and the premium received reduces what is tied up in them.
• Cash-Secured Put: the strike less the bid. The cash kept to buy the shares at the strike is the capital, again less the premium received.

For a covered call, the stock price is the underlying price the screening service reports with the contract.

Step 3: the interval return

The interval return is the bid divided by the capital. It is the return over the life of the option, from now to expiration, if the option expires and nothing else happens.

Step 4: annualizing

The interval return covers a period that might be days or months. To put contracts with different expirations on one scale, OpScout scales it to a year:

Annualized return = interval return × 365 ÷ days to expiration

Three details matter:

• The days are counted in fractions of a day, from the moment of the check to 4:00 p.m. Eastern Time on the expiration date. The same cut-off is used on early-close days, which makes the figure slightly lower on those days.
• The scaling is simple, not compounded. It does not assume premiums are reinvested.
• Results are rounded to a thousandth of a percentage point.

When few days remain, including on the expiration date itself, the division by a small number makes annualized returns very large and very sensitive to small changes in the bid. A large annualized figure on a contract that expires soon is a property of the arithmetic, not a sign of anything.

For a covered call: if the shares are called away

A covered call can end with the shares sold at the strike. OpScout also works out the annualized return for that case:

Return if called away = (bid + strike − stock price) ÷ capital, annualized the same way.

This adds the gain or loss from selling the shares at the strike to the premium.

The premium per contract

Alongside the returns, OpScout states the premium per contract: the bid times the contract's multiplier, rounded to the cent. The multiplier is worked out from the figures the screening service supplies; it is often 100, but adjusted contracts can differ.

What the figure leaves out

The calculation does not include, and makes no adjustment for:

• commissions and exchange, regulatory or other fees;
• taxes;
• dividends;
• early exercise or early assignment;
• slippage, partial fills, or the price moving before an order fills;
• financing, margin or borrowing costs, or what the capital could earn elsewhere.

And it assumes the same result could be repeated over a year, which is not guaranteed and often not possible. An annualized return is a way to compare contracts, not a forecast. What calculations do not include.

How a Monitor uses it

In a Covered Call or Cash-Secured Put Monitor you set a minimum annualized return. The screening service first applies it to its own annualized figure, to narrow the contracts it returns. OpScout then applies it again to its own figure at the bid, and only contracts that meet it there match.

When several contracts match, the Alert names the one with the highest annualized return at the bid, with ties broken by a narrower bid/ask spread, then higher open interest, then fewer days to expiration. The named contract is first by that order and nothing more; it is not a recommendation.

No bid or return OpScout shows is a quote you can trade on. Confirm prices and contract terms with your broker before acting.

Covered Call alerts · Cash-Secured Put alerts · Glossary