Options Glossary

Glossary: Annualized Return on Capital [AROC]

Last Updated: December 27, 2016

Glossary

Annualized Return on Capital [AROC]

What Does Annualized Return on Capital [AROC] Mean in Options Trading?

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:
annualized-return-on-capital
Trade A = (1+0.05)^(52/4) - 1 = 88% Annualized Return
Trade B = (1+0.09)^(52/8) - 1 = 75% Annualized Return

Synonyms:
Annual Return on Capital

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