Wow we hit page 600 for this thread. Thanks to all that have contributed.

The calculation proposed for ROI in this thread is atypical. I reproduce it here as a reference:
mROI = 365/DTE/12*(Premium - fees)/(Margin * 3)

An ROI implies an initial investment and future return(s). In the case of selling options, the initial investment is the capital that is set aside to cover margin less the collected premium.
Initial investment = 3 * IM - (Premium - Fees)

If we have only one future payout, as we do most of the time selling options, then the return is simply the payout divided by the initial investment and time adjusted.
mROI = {[MM* IM - (Premium(tout) + Fees(tout))] / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/tout) - 1
where,

• MM = Margin Multiple (how much of the IM margin you are setting aside for this trade)
• IM = Initial Margin
• t = days elapsed since the transaction was initiated. So t = 0 is when the initial investment was made and tout is the day the transaction was closed

Simplifications:
If you hold to maturity and there are no exit fees; the formula simplifies to:
mROI = {(MM * IM) / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/DTE) - 1

Example:


If you assume you can get 50% of your premium back after 30 days and there are no exit fees; the formula simplifies to:
mROI = {(MM * IM - Premium(0)/2) / [MM* IM - (Premium(0) - Fees(0))]} ^(365/12/30) - 1

Example:


It doesn't make a huge difference in the mROI result; but it should be a bit more accurate.

TFOpts, I am holding the full IM * 6 for each spread until exit. I don't reduce that by premium collected.

ron99 

TFOpts, I am holding the full IM * 6 for each spread until exit. I don't reduce that by premium collected.

Ron, that's right; but what happens to the premium you collected? Doesn't that get used to pay for some of the IM * 6 that you have to put up? If you need to put up $1,500 as collateral but you collect $100, isn't your out of pocket cost $1,400?

TFOpts 

Ron, that's right; but what happens to the premium you collected? Doesn't that get used to pay for some of the IM * 6 that you have to put up? If you need to put up $1,500 as collateral but you collect $100, isn't your out of pocket cost $1,400?

If my account has $30,000 in it I acquire 20 spreads not 21. And I hold the $30,000 until exiting. I don't use premium collected until the position is closed.

If I reduced from $1,500 to $1,400 then I would have to increase the MM to cover the risk because of less cash excess.

ron99 

If my account has $30,000 in it I acquire 20 spreads not 21. And I hold the $30,000 until exiting. I don't use premium collected until the position is closed. If I reduced from $1,500 to $1,400 then I would have to increase the MM to cover the risk because of less cash excess.

Thanks for the clarification. So in your example with a $30,000 account, you acquire 20 spreads with a margin requirement of $30k and receive premium of $2,000. Your account balance is $32,000 at the time you put on the position; but $2,000 of that (the premium) is not available for any purpose until the position is closed.

If that's the case then the original mROI formula is pretty much correct. The only revision might be to convert it to a compound rate.
mROI = {1 + [(Premium(0) - Fees(0)) - (Premium(tout) + Fees(tout))] / (MM * IM)} ^ (365/12/tout) - 1

For my education (I'm new to this), can you explain why the premium is not available immediately? Is the premium accounted for in the actual margin requirement? I.e. a margin call happens when your account balance less premium exceeds the margin requirement?

All of the premium collected when you sell an option is not available to you. Yes you collect the premium but they subtract from your account the current value. So the only thing available is net profit on premium minus fees.

In this example the account was empty then I sold ES spreads. The net premium collected was 1,700 credit. At the end of the day they were at 2,100 debit or losing 400. The 400 comes off of the Net Liquidating Value. The Net Liquidating Value is the amount you have to cover margin.

Net Liquidating Value minus Risk Maintenance needs to be positive. If it goes negative then you are on margin call.

The Margin Default/Excess is money you have to acquire new positions. But you want to keep plenty there to cover adverse moves against you.

ron99 

Net Liquidating Value minus Risk Maintenance needs to be positive. If it goes negative then you are on margin call.

Ron, thanks for taking the time to explain all of this to a beginner. Based on this information, I believe the mROI formula should be:

mROI = {[MM * IM(Start) + Premium(Start) - Premium(End) - Fees(End)] / [MM * IM(Start) + Fees(Start)]} ^ [365/12/(End-Start)] - 1

Where,

Start = date the position was acquired
End = date the position was liquidated
MM = margin multiple
IM = initial margin

Would you agree?

Note also that you can use the XIRR function in Excel to get the same result (see attached for example). Hopefully the cash flows are correct now.

A general question if that's okay: does the margin have to be in cash? Or can I invest it in relatively safe securities (money market funds, etc.).

TFOpts 

A general question if that's okay: does the margin have to be in cash? Or can I invest it in relatively safe securities (money market funds, etc.).

Depends on broker. But most want cash.