Methods for Calculating Return

When considering several trade candidates, I use annualized rate of return of each alternative. Annualized rate of return assume you can repeat the trade indefinitely for 1 year. This assumption is a little bit exaggerated, and a little bit unrealistic, but for the purpose of comparing alternatives it will serve the purpose well.

The process of calculating the annualized rate of return requires the following data:
1. $ return from the trade
2. $ risk in the trade
3. duration of the trade

Example:
Trade A is estimated to produce $3.5 return from $1.950 investment in 3 weeks time. Trade B produce $7 return from $2.000 investment in 2 weeks time. The calculation produce ROI for trade A is 3.11% and trade B is 9.1% (both comparable in annualized ROI).

If you’re trading options, the calculation is based on the value at expiration. So, the basic assumption is to hold the options until its expiration. Actual ROI will vary depending on your exit price.

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