Put Selling and Calculating Rate Of Return

Put selling has been my favorite investment strategy for over 3 decades. I commenced put selling when only a handful of stocks even had options available and there were no ETFs, derivatives, VIX, volatility index funds, ultra funds and a myriad of investing vehicles. There are so many products and asset classes that it is no wonder the amount of investing has grown incredibly. Yet there I remain, put selling against a basket of large cap stocks. But my Put Selling strategy provides profit and income and that is all that I need to grow and compound my money.

Recently I had an investor post a comment about my Microsoft Stock and Put Selling A Rising Stock article. He wondered about calculating the percent of returns on put selling. In my article I had looked at the overall gain on my Microsoft Stock put selling trades and divided it by the amount of my capital which at the end of the trade was still at risk. That return then was 8.6%. However he pointed out that the amount at risk varied at different times making the return different. He decided that 3.0% was a truer amount to report because at one point I had risked $180,000.00 and if the market had crashed I could have been assigned on all 60 puts. Therefore he took the amount of income made $5344.00 and divided it into $180,000 for a return of 3%.

Put selling and deciding on returns is always a numbers game for a lot of people. Some like to look at an option trade and then “annualized” the return which can come up with some pretty spectacular percentages.

Back in the 1970’s when I started investing I was taught that the real return is “did you get out with your capital intact”. If you did it was a great trade. Back then as an investor we were looking to grow our capital and compound it as often as possible.

However to figure out exactly what was the rate of return from a series of trades I was taught that you took each trade separately and calculated from there. This is because each trade requires capital placed at risk and rate of return or ROR, is based on the amount of capital earned divided by the total capital invested. By taking that method the rate of return for my recent Put Selling trades on Microsoft Stock would be:

Here are the trades to date: (all figures are US Dollars and include commission charges)

MICROSOFT STOCK PUT SELLING TRADE 1

Jan 3 with Microsoft Stock at $26.50 I sold 20 Feb $26 puts for .58 cents = $1128.00
Capital at risk = $52,000
Jan 24 with Microsoft Stock at $29.35 I bought to close 20 Feb $26 puts for .04 cents = ($112.00) * (Position Closed early)
Cost To Close Trade = $112.00
Total Earnings = $1016.00
Put Selling Return = $1016 / $52,000 = 1.9%

MICROSOFT STOCK PUT SELLING TRADE 2

Jan 12 with Microsoft Stock at $27.80 I sold 20 Feb $27 puts for . 47 cents = $908.00
Capital At Risk = $54,000
Feb 1 with Microsoft Stock at $29.85 I bought to close 20 Feb $27 puts for .04 cents = ($112.00) * (Position Closed early)
Cost To Close Trade = $112.00
Total Earnings = $796.00
Return = $796 / $54,000 = 1.4%

MICROSOFT STOCK PUT SELLING TRADE 3

Jan 24 with Microsoft Stock at $29.35 I sold 20 Mar $29 puts for .61 cents = $1188.00
Capital At Risk = $58,000
Cost To Close Trade = $0.00 – Puts Expired
Total Earnings = $1188.00
Put Selling Return = $1188 / $58,000 = 2.0%

MICROSOFT STOCK PUT SELLING TRADE 4

Feb 1 with Microsoft Stock at $29.85 I sold 20 Mar $30 puts for .45 cents = $868.00
Capital At Risk = $60,000
Cost To Close Trade = $0.00 – Puts Expired
Total Earnings = $868.00
Put Selling Return = $868.00 / $60,000 = 1.4%

MICROSOFT STOCK PUT SELLING TRADE 5

Feb 27 with Microsoft Stock at $31.25 I sold 20 Mar $31 puts for .42 cents = $808.00
Capital At Risk = $62,000
Cost To Close Trade = $0.00 – Puts Expired
Total Earnings = $808.00
Put Selling Return = $808.00 / $62,000 = 1.3%

MICROSOFT STOCK PUT SELLING TRADE 6

Mar 23 with Microsoft Stock at $31.85 I sold 20 April $31 puts for .35 cents = $668.00
Capital At Risk = $62,000
Total Earnings = $668.00
Put Selling Return = $668.00 / $62,000 = 1.07%

Total put selling income earned is $5344.00. Capital presently at risk = $62000.00
Rate Of Return = 9.07%  This figure is derived by adding up each individual trade’s put selling return.

Put Selling Returns I Believe Should Be Based On Each Trade's Own Risk Versus Income

Put Selling Returns Conclusion

By taking each trade as a separate trade which is probably the best way to calculate a return as each trade risks capital independent of the other trades, the total return from the 6 trades can be concluded as being 9.07%. This is fairly close to the amount I recorded in my article on Microsoft Stock and Put Selling A Rising Stock in the first place although it should be pointed out that Put Selling Trade Number 6 is still active.

Rate Of return or ROR or Return On Investment or ROI is defined as the ratio of money gained or lossed on an investment in direct relation to the amount of money invested. Therefore I believe it is probably best to calculate each trade’s return separately as capital was placed at risk for each trade. Select this put selling link to read more about rate of return on investing.

Suffice to say that each investor can decide what their return is based on whatever method they believe suits their strategy. I prefer not using annualized gains for put selling trades as I see no point in closing a trade for a 1.4% gain whether it be 1 week or 1 month and reporting I made a huge gain annualized. I also believe reporting annualized gains can give an investor of false sense of how well they are performing within their overall put selling portfolio.

Look At The Total Capital Available For Investing To Determine Your True Gain

I think the way to look at a trade is how much has been made against the entire portfolio of capital available by the end of the year. Therefore what is important to me is that I made $5344.00 in my trades which adds to my overall USA Stock portfolio and for me when it comes to put selling, the amount I made by the end of the year versus my total capital available in my portfolio is what really counts.

  • Lenpetry

    Playing with numbers is a treacherous game, to be sure.

    1) I think that annualizing returns is useful to compare two puts with different premiums and expiration periods. How else to know which one is the better option? I would take the premium net of commissions, divide by the number of days to expiration, then multiply by 365, and divide by the capital at risk = annualized return.

    To be sure, it is not feasible to get the same premiums over the entire 365 days of the year, and that is perhaps what you mean by the investor’s getting a false sense of how he is doing when annualizing his put-writing premiums. But if he reminds himself that annualizing returns is simply a method to compare two puts, then he will use the tool properly.

    The only real measure of how well one is doing is to compare the portfolio balance at the beginning and the end of a year. A series of individual returns for individual transactions woudl not tell me how well I am doing overall.

    2) But let’s get even more complicated. How to measure the return where you write a put (strike is $50; expiry in 6 days), the stock declines below $50 and is put to you. You immediately write a call (strike at $50; expiry in 7 days), and when the stock recovers and rises above the strike price, it is called away?

    If you want to treat the put and call as a single transaction, then the income is the two premiums, and there is no capital gain/loss. But for calculations purposes, how much capital is at risk? It is at risk for the 6 days of the put, but is not at risk for the 7 days of the call. Perplexing.