Annualized ROI on Options: Formula, DTE Effect and 40 Backtests

Annualized ROI on an option trade is the premium divided by the capital at risk, scaled to a 365-day year. A cash-secured put that collects $1.00 on a $50 strike earns 2.0% in 35 days. That is 20.9% annualized with the simple formula (2.0% × 365 / 35), or 22.9% if you compound it. The number lets you compare a 7-day trade with a 60-day trade on one scale. It is not a forecast of what you will earn.

This guide covers the formula for covered calls and cash-secured puts, why short-dated trades always look better once annualized, and what annualized returns looked like across 40 simulated two-year wheel backtests.

The annualized ROI formula for options

Two steps: compute the return for the trade, then scale it to a year.

Step 1: trade return. Premium received divided by the capital tied up.

• Cash-secured put: premium ÷ strike. The strike is the cash you hold per share in case of assignment.
• Covered call: premium ÷ stock price, or ÷ your cost basis if that is how you track the position.

Step 2: annualize. There are two common ways.

trade_return   = premium / capital

simple annual  = trade_return × (365 / DTE)
compound annual = (1 + trade_return) ^ (365 / DTE) − 1

The annualized ROI options scanners display is almost always the simple method. That includes the cash-secured put scanner and covered call scanner on this site. Both divide premium by the strike (puts) or the current price (calls), then multiply by 365 / DTE. The compound method assumes every cycle's premium gets reinvested, so it always comes out higher for positive returns.

Use one method consistently. Mixing a compounded figure from one tool with a simple one from another is how a 21% trade gets compared with a 23% trade that is really the same trade.

Worked example: the same $50 put at three expirations

Here is one strike, $50, sold at three expirations. The premiums are illustrative, not live quotes; they are there to show the math.

The 7-day put collects the least money and shows the highest annualized ROI. Annualizing multiplies its 0.60% by about 52, while the 60-day return is multiplied by about 6. Theta decay is faster close to expiry, so short-dated premium usually does annualize better on paper.

Before you chase the top row, here is what the 7 DTE number assumes:

• You can sell the same put at the same premium 52 times in a row.
• No cycle loses money, gets assigned at a bad price, or sits in cash between trades.
• Commissions and the bid-ask spread on 52 trades do not eat the edge.

None of those hold for a full year. Annualized ROI ranks the trades on the table. It does not tell you which one leaves the most money in the account.

Annualized ROI vs real results: 40 simulated wheel backtests

To see how annualized numbers behave over a real stretch of market, look at a backtest. The figures below come from Days to Expiry's simulated wheel backtests: a 35 DTE / 2% OTM recipe (sell puts, take assignment, sell calls) run on 40 tickers from 2024-09-20 to 2026-09-18, held to expiry. These are simulations on historical option prices, not live trades. Pricing for every ticker below is modelled.

Three things stand out.

1. Annualizing does not reorder trades of the same length. Every ticker ran over the same 728 days. So the annualized ranking is the same as the total-return ranking. Annualizing only changes the picture when you compare trades or runs of different lengths, like the 7 vs 60 DTE puts above.

2. Simple vs compound matters more as returns get bigger. The backtest reports compound annualized returns. Here is TSLA done both ways:

TSLA total return over 728 days = 97.1%

simple:   97.1% × (365 / 728)            = 48.7% a year
compound: (1.971) ^ (365 / 728) − 1      = 40.5% a year

That is an 8-point gap on the same result. For SPY (19.1% total) the gap is small: 9.6% simple vs 9.2% compound. On a two-year run, the simple method overstates a big winner.

3. A high annualized return is not the same as beating the stock. AMD's simulated wheel annualized 38.7%, but buy-and-hold AMD returned 259% over the same window. The wheel caps upside when calls get assigned away. In the other direction, PG's wheel made 11.6% while the stock fell 16%. Premium cushioned the decline. Across the 40 tickers, the median annualized return held to expiry was about 14%. The spread ran from -17.8% (XLU) to 40.5% (TSLA), on the same recipe. Recipe returns depend mostly on the underlying.

The full 40-ticker results, including the version that closes every trade at 21 DTE, are on the 21-day rule research page. To run the wheel on your own ticker, use the wheel strategy backtest.

Why trade length changes the annualized picture

The same backtest also ran a second arm: close each position at 21 DTE instead of holding to expiry. That arm traded far more often (AAPL: 48 cycles vs 12) but annualized lower on every one of the 40 tickers. AAPL went from 14.1% to 2.0% annualized, and SPY from 9.2% to 5.2%.

More cycles did not mean more return, because each early close gave up the premium left in the last 21 days. Comparing per-trade annualized ROI would have told the opposite story. A 14-day hold that keeps half the premium annualizes well. Only the full-period result shows what the extra trading cost. These are simulated results for one recipe (35 DTE, 2% OTM). They do not carry over to other DTEs, strikes or credit spreads.

How to use annualized ROI without fooling yourself

• Compare like with like. Same denominator (strike vs price), same method (simple vs compound), same assumption about fees.
• Put assignment probability next to it. A 40% annualized put with a high chance of assignment and a 20% put far out of the money are different risks. The scanners on this site show both columns side by side.
• Annualize the position, not the trade. After a roll or an assignment, the premium you collected across the whole position matters more than the last ticket. If rolls are involved, start from your true cost basis after rolls before you calculate a return.
• Check it against a benchmark. A 10% annualized wheel on a stock that rose 30% a year underperformed holding the stock. The backtest table shows how often that happened.
• Track the realized number. What you collected over months, net of losses and idle cash, is the figure to grade a strategy on. An options portfolio tracker that groups premium by position gives you that.

For more on choosing the expiration itself, the cash-secured puts playbook covers DTE windows and assignment risk. The best stocks for cash-secured puts list applies these numbers to specific underlyings.

FAQ

How do you calculate annualized ROI on an option trade?

Divide the premium by the capital at risk to get the trade's return, then scale it to a year. The simple method multiplies by 365 divided by days to expiry. The compound method raises (1 + return) to the power of 365 divided by days to expiry, then subtracts 1.

What capital do you divide by for a cash-secured put or a covered call?

For a cash-secured put, divide by the strike, because that is the cash you set aside per share. For a covered call, divide by the stock price (or your cost basis, if that is the number you track). State which one you use, because the answers differ.

Why does a 7 DTE trade show a higher annualized ROI than a 45 DTE trade?

Annualizing multiplies a short trade's return by a larger factor (about 52 for 7 days, about 8 for 45 days). It assumes you can repeat the same trade at the same premium all year, with no losing cycles. A higher annualized number on a short trade is a rate you would have to keep earning, not money you have made.

Is annualized ROI the same as the return I will actually earn?

No. It is a way to compare trades of different lengths on one scale. Realized return also depends on assignments, losing cycles, idle cash and how the underlying moves. In the simulated 40-ticker wheel backtest above, annualized returns ranged from -17.8% to 40.5% on the same recipe.