Return on premium
Definition · Level 2 · Long options & hedges
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The profit or loss on a bought option divided by the premium paid, as a percentage. It shows the leverage: a small move in the stock can mean a big percentage gain, or the loss of everything.
Example
Pay 2.00 for a call that is worth 10.00 at expiry: profit 8.00 ÷ 2.00 = +400%.
Where Tradecraft teaches it
Level 2 · Long options & hedges, in the lesson “Long calls and puts: breakeven, profit and leverage”: Three numbers to know before you buy, and why a stock that rises 6% can still lose you money.
Related terms
- Long CallPay a premium for the right to buy 100 shares at the strike.
- Long PutPay a premium for the right to sell 100 shares at the strike.
- ArbitrageLocking in a profit, riskless in principle, from a price discrepancy by simultaneously buying the cheap side and selling the rich side of equivalent…
- Borrow feeThe annualized fee a short seller pays to borrow shares (and a lender earns); small on easy-to-borrow names, large on hard-to-borrow ones.
- CollarOwn the stock, buy a put below and sell a call above.
- ConversionOwn the shares, buy a put and sell a call at the same strike and expiry.