Calculating the IRR
Happy Ending
On September 5 I finally executed the trade. That also happened to be the date of the announcement of the company's clinical trial results. I watched with pleasure over the next few days as the stock price fell from $19.75 (at the time I placed the trade) to $17.54.
| Date | Open | High | Low | Close | Volume |
| 15-Sep-06 | 18.11 | 18.13 | 17.44 | 17.54 | 626,800 |
| 14-Sep-06 | 18.26 | 18.30 | 17.80 | 17.96 | 387,500 |
| 13-Sep-06 | 18.13 | 18.66 | 18.13 | 18.39 | 574,100 |
| 12-Sep-06 | 18.34 | 18.34 | 18.08 | 18.30 | 389,400 |
| 11-Sep-06 | 18.26 | 18.58 | 18.25 | 18.29 | 504,300 |
| 8-Sep-06 | 18.48 | 18.54 | 18.25 | 18.43 | 413,900 |
| 7-Sep-06 | 18.40 | 18.73 | 17.84 | 18.35 | 609,400 |
| 6-Sep-06 | 19.99 | 20.00 | 18.40 | 18.46 | 2,122,400 |
| 5-Sep-06 | 19.67 | 19.85 | 19.21 | 19.24 | 441,900 |
IRR Calculation
Thus my total profit was (1) the $0.85 per option sold, plus (2) the interest earned on my cash sitting in reserve in case needed for the protective buy order. My money market account was paying about 4%.
I held $21.10 in reserve for each option sold at $0.85. Thus my net investment was $20.25 per share. My percent return on the option sale was (0.85 / 20.25), or 4.2% in ten days. There are 36 ten-day periods in a year, so the annualized value of the 4.2% return was ((1.042)^36)-1), or 339%. Add to that the 4% rate I was earning in money market, and my total annualized IRR was 343%.
So now you know how the boastful numbers are calculated by the guys who promised to teach you how to earn 1000% return.