how do I calculate rate of return on call options that are spread
Outside of software that can calculate the returns:  You could calculate your possible returns on that leap spread as you ordinarily would, then place the return results of that and the return results for the covered call position side by side for any given price level of the stock you calculate, and net them out. (Netting out the dollar amounts, not percentage returns.)  Not a great answer, but there ya go. Software like OptionVue is expensive You don't necessarily have to use a LEAP to do a spread. Since you are doing a covered call, I'm assuming that you would be comfortable with having that call exercised and you are bullish on the stock. So doing a spread trade with the short call option would essentially be capping your maximum profit without risking the obligation to sell the stock below market value.  An example for the payoff from a bull call spread: long lower strike call, short higher (covered) strike call can be found here
The most likely explanation is that the calls are being bought as a part of a spread trade.  It doesn't have to be a super complex trade with a bunch of buys or sells. In fact, I bought a far out of the money option this morning in YHOO as a part of a simple vertical spread.  Like you said, it wouldn't make sense and wouldn't be worth it to buy that option by itself. "Their algorithm may be different (and proprietary), but how I would to it is to assume that daily changes in the stock are distributed normally (meaning the probability distribution is a ""bell curve"" - the green area in your chart).  I would then calculate the average and standard deviation (volatility) of historical returns to determine the center and width of the bell curve (calibrating it to expected returns and implied volaility based on option prices), then use standard formulas for lognormal distributions to calculate the probability of the price exceeding the strike price. So there are many assumptions involved, and in the end it's just a probability, so there's no way to know if it's right or wrong - either the stock will cross the strike or it won't." Late to the party, but it's just improving your cost basis in a defined risk trade even further. If you want to put up less risk capital but want to test the waters, this can be one way to do it. Another could be buying cheap OTM butterflies or financing a further otm option with the basis reduction from the debit spread if you want to gamble a bit further and venture into 15-20 delta positions. Usually, I am doing debit spreads with a buying atm and selling a couple strikes further otm or at least at the most liquid strikes, but if it's a high flier, it can be disappointing, but a good trade. If you're more of a contrarian in where you buy your calls/puts, it's absolutely a good way to lessen your risk on a calculated bet. "As a self-employed Handyman I can tell you this.  Any work that is done, be it professional, part-time, hobby or whatever else, has to answer to two primary criteria.  As you asked, it has to be worthwhile in financial terms and more importantly in personal terms.  In the long term, charging low rates will demoralize her.  Not worth it. Someone once said; ""I have no quarrel with he who charges cheaply, because who better then he knows the value of his services""?  Obviously one has to remain reasonable.  Then there is an ambush factor in working for yourself.  I call it syphoning losses since they are extremely difficult to calculate as noted above here already.  In the first place they are extremely difficult to detect anyway.  Micro-management will not tell you the losses, you can only do it at the end of a period on a balance sheet.  Then you have to calculate a fair price in terms of lessons given and monies received. The trick is to gain a fair assessment of worth to her without her needing to go into the books, just as a simple gut feel.  She needs to really feel good about it to maintain motivation for the future.  Otherwise, I did it, it does not work. The other consideration is that when money changes hands it places a benchmark on the tuition and the relationship.  One.  It locks her into delivering professional work as she already is one.  Two.  The students will be locked into giving fair and excellent commitment in being taught. A simple calculation goes like this; Use the time span of a month as it is easier to break down available time per week.  Also remember that there will perforce be extra hours spent in consultation with parents,  this is a syphoning cost, it has be calculated. Difficult at the start, but keep track of it.  One other thing.  I do not give discounts of extend favours, but I keep my prices reasonable. [[I was told I am some 25% more expensive than the latest quotes, but I kept on getting work with a high execution to quotation rate.]]  Floating prices are  impossible to track, manage and justify,  people talk to each other, whether you like it or not.  Do proper, reasonable calculations and be up front to all about how you work.  In contract on paper.  It just may be necessary to scale prices from beginner to advanced classes. OK, $50 seems a fair price, I don't live in the States, but about three/four Big Mac's would compare about right.  You are NOT selling time, you ARE selling expertise. Decide how much she wants out of it per month. Forget retirement, you live now.  This income will also cover other ""invisible"" extraneous work. Determine how much time will be spent in giving lessons.  You can only charge for ""visible"" work done. Basic Hourly Rate = Monthly Income / Lesson Hours. Then there's a catch.  Research has shown that owners of one man and small businesses spend about 55% of their time in getting new business.  So,now. Charged Hourly Rate = Basic Hourly Rate DIVIDED by 45%. This could frighten you, but these are hard commercial facts.  Things could appear to be extremely expensive.  You will; however; have a solid base from which to decide as you go further.  The accounting is a good place to start, but she, you both rather, have to feel good about the rewards and the counter performances. Great success to you both!" You could use  the Gordon growth model implied expected return: P = D/(r-g) --&gt; r = D/P (forward dividend yield) + g (expected dividend growth). But obviously there is no such thing as a good market return proxy. (Note: I am omitting the currency units.  While I strongly suspect it's US$ I don't know from the chart.  The system works the same no matter what the currency.) A call or a put is the right to sell (put) or buy (call) shares at a certain price on a certain day. This is why you see a whole range of prices.  Not all possible stock values are represented, the number of possibilities has to be kept reasonable.  In this case the choices are even units, for an expensive stock they may be spaced even farther apart than this. The top of the chart says it's for June.  It's actually the third Friday in the month, June 15th in this case.  Thus these are bets on how the stock will move in the next 10 days. While the numbers are per share you can only trade options in lots of 100. The left side of the chart shows calls.  Suppose you sell a call at 19 (the top of the chart)  The last such trade would have gotten you a premium of 9.70 per share (the flip side of this is when the third friday rolls around it will most likely be exercised and they'll be paying you only 19 a share for a stock now trading at something over 26.)  Note the volume, bid and ask columns though--you're not going to get 9.70 for such a call as there is no buyer.  The most anybody is offering at present is 7.80 a share. Now, lets look farther down in the chart--say, a strike price of 30.  The last trade was only .10--people think it's very unlikely that FB will rise above 30 to make this option worthwhile and thus you get very little for being willing to sell at that price.  If FB stays at 26 the option will expire worthless and go away.  If it's up to 31 when the 15th rolls around they'll exercise the option, take your shares and pay you 30 for them.  Note that you already gave permission for the trade by selling the call, you can't back out later if it becomes a bad deal. Going over to the other side of the chart with the puts: Here the transaction goes the other way, come the 15th they have the option of selling you the shares for the strike price.  Lets look at the same values we did before.  19?  There's no trading, you can't do it. 30?  Here you will collect 3.20 for selling the put.  Come the 15th they have the right to sell you the stock for 30 a share.  If it's still 26 they're certainly going to do so, but if it's up to 31 it's worthless and you pocket the 3.20 Note that you will normally not be allowed to sell a call if you don't own the shares in question.  This is a safety measure as the risk in selling a call without the stock is infinite.  If the stock somehow zoomed up to 10,000 when the 15th rolls around you would have to come up with the shares and the only way you could get them is buy them on the open market--you would have to come up with a million dollars.  If there simply aren't enough shares available to cover the calls the result is catastrophic--whoever owns the shares simply gets to dictate terms to you.  (And in the days of old this sometimes happened.) "Say we are in 'normal times.' Passbook rates are 5% or so. Longer rates, 6-7%. I offer you a product with these terms, for $10,000 I will return a ""Guaranteed"" $10,000 in 6 years and based on the stock market, 1% for every 2% the S&P is up beyond 10% at maturity. As the seller of this product, I take $6666, and buy a fixed investment, 6 years at 7% in treasuries will return the $10000. Really. I then take the $3334 and buy out of the money calls on the S&P each year to capture the gains, if any, and to deliver on my promise.  This is one example of a structured deposit offering. They can have nearly any terms one can imagine. Tied to any product. S&P, Crude Oil, Gold. Whatever." For this, the internal rate of return is preferred. In short, all cash flows need to be discounted to the present and set equal to 0 so that an implied rate of return can be calculated. You could try to work this out by hand, but it's practically hopeless because of solving for roots of the implied rate of return which are most likely complex. It's better to use a spreadsheet with this capability such as OpenOffice's Calc. The average return on equity is 9%, so anything higher than that is a rational choice. Example Using this simple tool, the formula variables can easily be input. For instance, the first year has a presumed cash inflow of $2,460 because the insurance has a 30% discount from $8,200 that is assumed to be otherwise paid, a cash inflow of $40,000 to finance the sprinklers, a cash outflow of $40,000 to fund the sprinklers, a $400 outflow for inspection, and an outflow in the amount of the first year's interest on the loan. This should be repeated for each year.  They can be input undiscounted, as they are, for each year, and the calculator will do the rest.