How I calculate returns on Cash-Secured or Naked Put Trades

There are several schools of thought when it comes to calculating percentage returns on cash-secured or naked put trades. I will explain the way I do it.

For example: if I sell a put for $1.00 and buy it back for $.45 for a $.55 profit. I will calculate it as a 55% return. Profit percentage of $.55 divided by $1.00 = 55%.

Some will calculate it based on the cash or margin used as security. For example: If I sell a put for $1.00 at the $20 strike and buy it back at $.45 for a $.55 profit. Profit percentage of $.55 divided by $20 = 2.75%.

If you think about it, you really never use your cash or get charged margin interest if you buy back the put before expiration or it goes worthless. So if you make any kind of profit, you can't really calculate the profit percentage because you can't divide the profit amount by 0 (zero). You will get an error on your calculator!!!

In conclusion, the way I calculate my gain or loss may be different than what you may think is right. I just do it this way for tracking my performance.