Are covered calls worth writing
How do you calculate the return on investment (ROR) when buying and selling put options?
RoR for options you bought, is pretty simple:
(Current Value - Initial Cost) / Initial Cost will give you that actual Return.
If you have the Achieve a return you want to annualize that number: you divide the return you achieved above by the number of days the investment was made and then multiply that number by the number of days in a year. (365 if you are using calendar days, roughly 255 if you are using trading days.)
The RoR for from you sold Options is much more complex:
The problem is, RoR basically calculates the amount of your return on investment in relation to the capital it has tied up to make it. It's easy when you've bought something. The capital tied up is the money that you raise. It is more complex with a position such as a short option where the transaction in question is at Raising cash generated .
The correct way to deal with this is to A) bundle your strategy (options, stocks and collateral) in a RoR if applicable, and B) include all collateral needed to support the short option in the calculation.
So if you were to sell a "cash backed" put that required you to post the money you would need to receive the stocks if they were handed over to you, the initial cost is the total amount you would need to place the trade on: In this case, it is the amount of money minus the premium that you raised for selling the put.
That's only an example. However, the approach is more general: if you're using covered calls, your initial cost is the cost of the stock minus the premium generated by selling the call.
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