What an Annualised Return Actually Claims
It assumes perfect redeployment and no losses. That makes it a comparison unit, not a projection.
Worth reading first: Cash-Secured Puts, From Cash to Assignment
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A 30-day cash-secured put returning 1.9% shows an annualised figure near 24%. That number is arithmetically correct and it is the most over-interpreted figure in premium selling.
It is a unit of comparison, like a price per litre. It is not a forecast, and the three things it quietly assumes are all false.
Where the number comes from
Move the strike and the expiration. Return on capital is the honest per-cycle figure; the annualised one below it is that figure scaled to a year.
Stock trading at $100.00
The formula, and what it says
Annualised % = (net ÷ capital at risk) × (365 ÷ days) × 100This is exactly how lib/finance.ts computes it, on hypothetical inputs.
Read literally, it says: if this exact trade repeated back to back for a year, and every repetition worked, this is what you would earn.
That is a precise and narrow claim. It is useful precisely because it is narrow, it lets you compare a 21-day trade to a 45-day one on the same axis, which the raw credit cannot do.
Three assumptions, all false
1. Perfect redeployment. It assumes the moment this trade closes, an equally good one is available and you take it. Real books have gaps: waiting for a setup, waiting for settlement, holding cash deliberately. See utilisation.
2. Every cycle works. The numerator is the credit, the expires-worthless outcome. Losing cycles are not in the figure at all, and they are not rare.
3. Nothing changes. Volatility, and therefore premium, varies enormously across a year. The 24% is computed from today's conditions extended for twelve months.
| Adjustment | Effect | Running |
|---|---|---|
| Headline annualised | — | 24.0% |
| 80% capital utilisation | ×0.80 | 19.2% |
| One in five cycles assigned at a loss | −4.5pp | 14.7% |
| Commissions and spread | −1.5pp | 13.2% |
| Short-term tax at 32% | ×0.68 | 9.0% |
Adjusting a 24% annualised figure toward something realistic. Illustrative.
Nine percent is a perfectly respectable return. It is also a long way from twenty-four, and the gap is entirely made of things the formula was never claiming to include.
What it is genuinely good for
Comparing candidate trades. A 21-day trade paying 1.2% and a 45-day paying 2.4%, which uses capital better? Annualising answers it immediately: 20.9% against 19.5%. This is the number's real job and it does it well.
Comparing strikes. Within one expiration, it ranks strikes by capital efficiency, see strike selection.
Spotting anomalies. A figure far above the usual range for that underlying is a signal to look for the reason. It is almost always an earnings date or a pending event, not a mispricing.
What it is not for
Projecting income, comparing to a fund's actual return, or telling anyone what you “make”. For those, use realised results against capital and time actually committed.
What can go wrong
Treating it as expected return. Losing cycles are excluded by construction.
Chasing the highest one. It rises toward the money and toward events. Both of which raise risk faster than reward.
Comparing it to an index return. One is a projected best case, the other is realised.
Annualising a rolled chain from its final leg. Ignores the capital already committed.
Key takeaways
- Annualised return scales one cycle's expires-worthless outcome to a year, a comparison unit, not a forecast.
- It assumes perfect redeployment, no losing cycles, and unchanging conditions. All three are false.
- A 24% headline can be closer to 9% after utilisation, losses, costs and tax.
- Its real job is comparing trades of different durations and strikes, which it does well.
- For what you actually earned, use realised results against the capital and time genuinely committed.
Check your understanding
1. A 21-day trade returns 1.2% on capital; a 45-day returns 2.4%. Which uses capital better?
2. What does the annualised figure exclude by construction?
3. You see an unusually high annualised figure on a familiar underlying. What should you do?
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