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As mentioned above the call option is only valid for a specific
time period. When this period ends it is called ‘Expiration’. This
happens on the third Friday of every month. At expiration two things
can happen.
 If the
market price of the stock is greater than the strike price of the
call. Then it is sensible for the holder of the call to exercise
his option to buy the shares at the lower strike price rather than
pay the higher market price. In this case the call is assigned,
the stock is sold at the agreed ‘strike’ price and the
position is closed for a pre-determined return, the is known as
the % Assigned return. In the above chart the % Assigned return
would be 31.58%, see below;
Appreciation = Strike Value - Buy Value
Appreciation = $25.00 - $22.00
Appreciation = $3.00
% Return if Assigned = [Premium Income + Appreciation] ÷
[Buy Value - Premium Income]
% Return if Assigned = [$3.00 + $3.00] ÷ [22.00 - $3.00]
% Return if Assigned = 31.58%
If the
market price of the stock is less than the strike price of the call.
It makes no sense for the call holder to pay the strike price for
his shares when he can go to the market and buy them more cheaply.
In this case the call expires worthless and is no longer valid so
disappears however the investor continues to hold the stock so he
can write another Covered Call and generate further income. This
is known as the % Not Assigned return or % Downside protection,
in the above example this would be 13.64%, see below;
% Not Assigned Return = Premium Income ÷ [Buy price of shares]
% Not Assigned Return = $3.00 ÷ [$22.00]
% Not Assigned Return = 10.7 %
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