Evaluating Opportunity Return Expectations
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How is the return expectation number calculated?
You can learn more with the Technical Documentation.
Many options articles claim that your premium should be at least 1/3 of the spread's width. Could I use this decision recipe?
Yes, you would input that the Rate of Return is greater than 33% for this example.
Is this recipe only used for entries or could this be used for exits as well?
You would typically use this as an entry condition to ensure the trade fits your risk to reward criteria.
Can the rate of return calculation be done on any options strategy?
Rate of return can be applied to risk-defined strategies.
What might cause the rate of return to increase or decrease?
The amount of credit received and the spread width are the two components used to determine Rate of Return.
Can this calculation be used for stocks as well?
Options only. Stocks does not have a rate of return because there is no spread width.