This article will show you how to calculate the annualized return on trades we often make at Dorian Trader. We will examine 4 types of trades, selling a naked put, a covered call, a Long Date Naked Put (Ernie style trade) and a bullish put spread. We will use Amazon (AMZN) trading at the current price of $183.15 to examine how to use the formula to get the annualized return. You can plug these formulas into an Excel spreadsheet, and it will do the calculations for you.
Example: AMZN is trading now at $183.15. You sell the 177.50 Put. Expiration is in 29 days. Premium collected is 2.15 ($215). Buying power (BPE) is $3116. The delta on this trade is 29, but this number is not needed for the formula. Use your excel and plug in this AMZN trade.
=(215/3116)*(365/29) You could do the math on your calculator which would be:
=(.0689987)*(12.5862) This will give you an annualized return of 86.84% which could be divided by 12 and the monthly return would be 7.24%
=(223/18315)*(365/29) If you did not use excel to do the math and used a calculator:
=(.0121758)*(12.586) Answer: 15.32% annualized return. Divide by 12 and monthly return: 1.28%.
AMZN trading at $183.15. Selling the 110P. Delta 5. Collecting $176. DTE 393. BPE 1101.
=(176/1101)*(365/393) Excel will do this math for you, but if you don’t use excel here is the math:
=(.1598546/1101)*(.9287543) Answer: 14.85%. Divide by 12 for monthly return of 1.24%.
AMZN trading at $183.15. Selling 172.50P and buying the 167.50P. Short delta 34 (not needed in formula). Collect $130. BPE -371. DTE 29
=(130/371)*(365/29)
=(.3504)*(12.5862) Answer: 441%. Divide by 12 for monthly return of 36.75%.
Once you practice this for awhile, you will see that all of the formulas are nearly identical. You take the premium collected and divide it by the cost of your trade (either the buying power or in the case of the covered call, your cost of owning 100 shares). Then you multiply that times 365 days in a year divided by the days to expiration.
I will copy and paste here the answer Perplexity gave me to that question.
Answer
For a bullish put spread options trade with a premium collected of $130, buying power effect of $371, and 29 days to expiration, the annualized rate of return can be calculated as follows: Premium Collected = $130 Buying Power Effect = $371 (maximum potential loss) Days to Expiration = 29Rate of Return
= (Premium Collected / Buying Power Effect) x (365 / Days to Expiration) x 100% = ($130 / $371) x (365 / 29) x 100% = 35.04% x 12.59 = 441.15%
Therefore, the annualized rate of return for this bullish put spread trade is approximately 441.15%. This high rate of return is due to the limited risk exposure (buying power effect of $371) compared to the premium collected ($130), combined with the relatively short 29-day holding period.
