Two Denominators, Two Very Different Numbers
The same trade looks modest or spectacular depending on what you divide by.
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“This trade returns 3%” is ambiguous, and the ambiguity is worth several multiples. Three percent of what?
Two denominators are in common use, they differ by an order of magnitude, and people quote whichever produces the more pleasing number, usually without realising there was a choice.
One trade, two denominators
The return-on-capital figure divides by the cash secured. Divide instead by the premium and you get a different number entirely, and a different question answered.
Stock trading at $100.00
The two figures
RoC = net premium ÷ capital committedReturn on capital: what your money earned.
RoR = net premium ÷ maximum lossReturn on risk or on margin: what the amount at stake earned.
On a cash-secured put these are nearly the same, because the capital committed and the maximum loss are both roughly the strike value. On a defined-risk spread they diverge enormously.
| Cash-secured put | $95/$90 spread | |
|---|---|---|
| Net premium | $184 | $114 |
| Capital committed | $9,500 | $386 |
| Return on capital | 1.9% | 29.5% |
| Maximum loss | $9,316 | $386 |
| Return on risk | 2.0% | 29.5% |
A $95/$90 put spread collecting $114, against the equivalent cash-secured put.
A third denominator nobody names
There is a version that is simply wrong and appears constantly in forums: premium divided by the stock price rather than by the capital committed.
“I collected $184 on a $100 stock, that's 1.84%” ignores that you committed $9,500 to a $95 strike, not $10,000 to the stock. It is close enough to be plausible and wrong enough to distort comparisons between underlyings at different prices.
Use the capital your broker actually holds. For a cash-secured put that is the strike × 100 × contracts; for a spread it is the maximum loss.
Which to use, and when
Return on capital for anything portfolio-level. It is the figure that aggregates: sum the capital, sum the premium, and you have the book's return. It answers “what did my money earn?”, which is the question that matters for the account.
Return on risk for comparing defined-risk structures to each other. Two spreads with different widths are properly compared on what is genuinely at stake.
Never mix them in one comparison. That is the entire practical rule.
And both still need time
Neither figure is complete without a duration. A 1.9% return over 30 days and over 90 days are different trades, which is what annualising normalises, and why dollar-days is the most complete version of the same idea.
The full chain: premium → return on capital → annualised → return per dollar-day. Each step adds a denominator, and each one makes a wider set of trades comparable.
What can go wrong
Comparing a spread's RoC to a CSP's. Different denominators, not a superiority claim.
Dividing by the stock price. Common, plausible, and wrong.
Quoting a return with no duration. Incomplete either way.
Using return on risk at portfolio level. It does not aggregate into an account return.
Key takeaways
- Return on capital divides by the money committed; return on risk divides by the maximum loss.
- They are nearly identical on a cash-secured put and differ by an order of magnitude on a spread.
- Comparing a spread's return on capital to a cash-secured put's is the most damaging version of the confusion.
- Dividing by the stock price instead of the capital committed is a third, simply wrong, variant.
- Use return on capital for portfolio-level figures; both still need a duration to be meaningful.
Check your understanding
1. A spread shows 29.5% return on capital against a cash-secured put's 1.9%. What does that tell you?
2. You sold a $95 put on a $100 stock for $184. What is the correct denominator for return on capital?
3. Which figure aggregates properly into a portfolio return?
Related lessons
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