0
$\begingroup$

If I have an option that has a net credit and results in a positive expected value (based on my own estimates of volatility), how do I calculate an ROI in order to compare with a net debit credit options?

  • Option 1: Net Credit +5 EV +1
  • Option 2: Net Debit -1 EV +10
  • Option 3: Net Credit +5 EV -1

Is there another metric that is better equipped to make the comparison between these? Is there information that is missing that is needed to make this comparison?

$\endgroup$
  • $\begingroup$ How do you compute the "expected value" of your option? Is it not the price you should be considering? Also how do you define net credit? $\endgroup$ – SRKX Nov 20 '16 at 15:43
1
$\begingroup$

To calculate ROI of an option(s) sold for a credit you divide the credit received by margin you must maintain to carry that position.Then do not forget to annualize that number.

$\endgroup$
  • $\begingroup$ An example would be great here because this is difficult to understand. $\endgroup$ – SRKX Nov 20 '16 at 15:40
  • $\begingroup$ For example: stock XYZ at $$95 and you sell 100/110 credit call spread for $$1 with 1 mon to expiration. I am using Reg-T margin , which is for spreads is just the difference between strike prices. Hence your margin is $$10. So your return is $$1/$$10 = 10% a month. Annualized to a 120% a year. $\endgroup$ – baerrus Jan 30 '17 at 19:13

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.