What is Annualized Return on Capital [AROC] in Options Trading ?
Annualized Return on Capital [AROC]
Annualized Return on Capital is calculated by taking the maximum possible return from the position divided by the margin requirement (capital requirement) to hold the trade. This return is then annualized for the year.
Annualizing allows a fair comparison between trades of different duration. It is very important to use annualized return vs. total return in your strategy in order to compare various trades of different duration accurately.
For example, if Trade A returned 5% in 4 weeks and Trade B returned 9% in 8 weeks, then Trade A actually has a higher annualized return than Trade B despite Trade B having a higher overall return.
The formula for calculating annualized return can be found below:
Trade A = (1+0.05)^(52/4) - 1 = 88% Annualized Return
Trade B = (1+0.09)^(52/8) - 1 = 75% Annualized Return