risk
Return on Capital (ROC)
Measures the potential return relative to the capital at risk (buying power reduction). The primary metric for comparing options strategies.
Formula
ROC = (Credit Received / Buying Power) × 100 Annualized ROC = ROC × (365 / DTE)
Variables
- ROC
- Return on capital (%)
- Credit
- Premium received (or max profit for debit trades)
- Buying Power
- Capital tied up / margin requirement
- DTE
- Days to expiration
Worked Example
Inputs
- Strategy
- $5-wide iron condor
- Credit
- $1.50
- BPR
- $3.50 (width - credit)
- DTE
- 45
Calculation Steps
- 1
ROC = $1.50 / $3.50 × 100 = 42.9% - 2
Annualized = 42.9% × (365/45) = 347.8% - 3
If managed at 50% profit: ROC = 21.4% in ~23 days - 4
Managed annualized = 21.4% × (365/23) = 339.6%
Result: ROC = 42.9% (full) / 21.4% (managed at 50%)
Intuition
ROC is more useful than raw P&L for strategy comparison. A $0.50 credit on a $1 wide spread (50% ROC) is better capital efficiency than $1.50 on $5 wide (30% ROC). Target 25-50% ROC on credit spreads, managed at 50% max profit.