The annualized premium is the value of the option divided by the strike price. You can use annualized premium to develop an intuitive understanding of how much the market is "paying" for a dollar of risk. For example, if a stock is trading at $50 and you sell a $50 strike 6 month call for $4, you are getting paid 8% in 6 months, or about 16% annualized, in exchange for being willing to buy at $50, the current price. Morningstar calculates annualized premium on a continuously compounded basis.
Sponsored Links