Annualized return calculator
Annualized return on an option premium is the period return times 365 divided by days held. It exists so you can compare a 21-day trade against a 45-day trade on the same scale. It is a comparison tool, not a projection of what your year will look like.
The formula, and the one people actually use
Two versions circulate and they give different answers.
- Simple: (premium / capital) x (365 / days). This is what every options screener quotes.
- Compounded: (1 + premium / capital) ^ (365 / days) - 1. This assumes every cycle is reinvested at the same rate, and it produces a bigger, more hypothetical number.
On 215 dollars against 17,000 over 45 days, simple gives 10.26% and compounded gives 10.73%. Close enough to ignore. The gap widens fast as the period return grows: at a 5% period return over 30 days, simple says 60.8% and compounded says 81.1%. Both are describing something that will not happen twelve times in a row.
Premium per day is the better comparison
Strip out the annualization entirely and divide the credit by the days you are exposed. 215 over 45 days is 4.78 a day. A 7-day trade paying 40 dollars is 5.71 a day, and it wins on that measure while looking worse on almost every other one.
Per day is also the number that makes rolling decisions obvious. If the roll pays 1.10 a day and a fresh position on the same capital pays 4.80, the roll is not a good trade regardless of how much you like the ticker.
Where annualized goes wrong
Weeklies annualize beautifully and trade badly. A 3-day trade paying 0.4% annualizes to 48.7%, which is why weekly-selling content is full of enormous numbers. What it leaves out is that you cannot fill 120 of those a year, the spreads eat a bigger share of a small credit, gamma risk near expiry is at its worst, and every earnings date in the calendar lands inside one of those windows.
The annualized number is real arithmetic on a false premise. Keep it for ranking two candidate trades. Do not put it in a spreadsheet cell called "expected income".
Questions people actually ask
Should I annualize using 365 days or 252 trading days?
Use 365. Option expiry is calendar-based, theta decays over weekends, and your capital is tied up on Saturday just like it is on Tuesday. The 252-day convention belongs to volatility calculations, not to return on capital.
What capital should I put in the denominator?
Whatever the trade actually locks up. For a cash-secured put that is strike times 100. For a covered call it is the shares at cost. Using the premium as the denominator produces enormous meaningless percentages, and a surprising number of screenshots on the internet do exactly that.
Why does my broker show a different annualized yield?
Most brokers use the current share price as the denominator rather than the strike, and most use simple annualization. Neither is wrong, they are just different conventions, which is why comparing yields across two platforms is usually comparing two formulas.