Annualized return on a cash-secured put
Annualized return on a cash-secured put is the premium divided by the secured capital, multiplied by 365 divided by the days held. A $0.55 credit on a $25 strike held 49 days is 2.2 percent, which annualizes to 16.4 percent. The number is useful for comparing trades and it is not a return you should expect to earn.
Everyone annualizes. Almost nobody says what the number means, so here is the formula and then the three ways it lies.
The formula
Return on secured capital = premium / (strike x 100).
Annualized = that, x (365 / days held).
The PFE trade: $55 / $2,500 = 0.022, so 2.2 percent. Then 0.022 x (365 / 49) = 0.164, so 16.4 percent annualized.
Use the strike as the denominator, not the stock price. The strike is what you actually have committed. Divide by the stock price and you get a slightly flattering number that is also wrong about what the capital was.
Lie one: it assumes you do it again immediately, forever
Sixteen point four percent means "if I could repeat this exact trade 7.4 times a year with no gaps and no losses". You will not. There are weeks where the premium is not there, weeks where you are assigned and holding shares instead, and the whole month after a drawdown where you do not want to be short puts at all.
The gap between the annualized number and what lands in the account is mostly this. Not slippage. Idle time.
Lie two: short-dated trades annualize into fantasy
Same PFE, but the weekly. Sell the $25 put 7 days out for $0.14.
- $14 / $2,500 = 0.56 percent.
- x (365 / 7) = 29.2 percent annualized.
Nearly double the 49-day trade. And it requires 52 consecutive winning weeks, 52 sets of commissions and spreads, and it hands you the full downside 52 times a year instead of 7.4. One bad week takes out a quarter's worth of those credits.
Weeklies annualize beautifully. That is a property of the arithmetic, not evidence that they are better, and the shorter the trade the more the annualized figure flatters it.
Lie three: it prices no risk at all
A 0.08 delta put and a 0.40 delta put both produce an annualized number and the formula treats them identically. It has nothing to say about the fact that one of them assigns twice a year and the other assigns twice a decade, or that both of them can lose the whole $2,445.
Two trades at the same annualized return are not the same trade. Compare within a delta band or you are comparing nothing.
What to do with the number anyway
Use it for one job, which it is good at: comparing candidates on the same day. The 45-day INTC $32 put at 20 percent annualized against the 45-day INTC $30 put at 11 percent tells you exactly what the extra $2 of cushion costs, in units you can think in.
Do not use it as a forecast, do not put it in a spreadsheet column labelled expected return, and do not compare a 7-day trade against a 60-day one without saying out loud that you are doing so.
Simple or compounded
Everything above is simple annualization, which is the convention and what the annualized return calculator reports. Compounding it gives you a bigger number: 2.2 percent compounded 7.4 times a year is 17.5 percent rather than 16.4.
Both are defensible. Simple is the more honest of the two, because compounding assumes you reinvest the premium into the identical trade at the identical rate, and that assumption is doing an enormous amount of work for 1.1 percentage points.
Questions people actually ask
How do you annualize a cash-secured put return?
Premium divided by strike times 100, then multiplied by 365 divided by the days held. A $55 credit on a $25 strike held 49 days is 2.2 percent, or 16.4 percent annualized.
Should I divide by the strike or the stock price?
The strike. That is the capital actually secured. Dividing by the stock price gives a slightly higher number that misrepresents what was committed.
Why do weekly puts show such high annualized returns?
Because dividing by a small number of days multiplies everything up. A 0.56 percent weekly credit annualizes to 29 percent, but earning it requires 52 consecutive wins, 52 sets of spreads, and 52 exposures to a gap.
Is annualized return the same as expected return?
No. It ignores assignment, idle weeks between trades, and losses entirely. It is a comparison unit for candidates on the same day, not a forecast of what your account will do.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read Cash-secured puts for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.