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Return on capital (options)

Premium collected or profit made divided by the capital the position actually ties up, which is the only way to compare structures fairly.

A $60 credit means nothing until you know what it cost to hold. The same credit against $190 of buying-power-reduction is a 32% return on capital; against a $4,750 cash-secured-put requirement it is 1.3%. Annualising both makes the comparison sharper still.

The number is easy to game, which is the warning attached to it. Return on capital rises automatically as risk rises, so a screen sorted by it will surface exactly the trades with the worst tails. It belongs next to max-loss and probability-of-profit, never alone.

Example: XYZ at $50. The 45-day $47.50 cash-secured put pays $1.10 on $4,750 — 2.3%, or about 19% annualised. The $47.50/$45 bull-put-spread pays $0.60 on $190 — 32%, or 256% annualised, with a loss that can be three times the credit.

Related: buying-power-reduction, capital-efficiency, max-loss, credit-spread

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

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