Yield on Capital, Not Yield on Premium: The Number That Actually Matters

The premium is what you notice. Sell a put, and a few hundred dollars lands in the account today — that feels like the trade. It isn't. The trade is the cash you just agreed to set aside until expiry, and the only honest way to judge what you're being paid is to measure the premium against that — the capital — not against itself.

This is the difference between yield on premium and yield on capital, and it's the number that decides whether one candidate is genuinely better than another or just louder.

Two ways to quote the same trade

Say a $45 stock lets you sell the 30-day $45 put for $0.60 — $60 for one contract.

• Yield on premium asks: what did I make relative to the premium? That's a meaningless 100%, and it's the framing that makes every option look like a jackpot.
• Yield on capital asks: what did I make relative to the cash I had to commit? You secured $45 × 100 = $4,500, less the $60 you received, so $4,440 of your money is tied up. $60 / $4,440 = 1.35% over 30 days.

Only the second number can be compared to anything. Annualise it — multiply by 365/30 — and you get roughly 16.4% a year, if you could keep re-running the trade at the same terms. That "if" is doing real work, and we'll come back to it.

The formula

For a cash-secured put:

collateral        = strike × 100 − premium received
yield on capital  = premium received ÷ collateral
annualised        = yield on capital × (365 ÷ days to expiry)

That's it. The whole point is that the denominator is the money at risk, not the money received. Whether you subtract the premium from the collateral (net) or not (gross) barely moves the answer; being consistent across candidates matters more than which convention you pick.

Why this is the honest number

The reason yield on premium flatters every trade is that the premium is a tiny denominator. Divide by a small enough number and everything looks spectacular. But your $4,440 isn't earning that premium and doing something else — it's committed to this one obligation until the option expires or you close it. It's doing a single job. Measure the pay against the whole capital that's doing that job, for the whole time it's tied up, and the number stops lying.

This is also what lets you rank a screen. Consider three real-shaped candidates:

Candidate	Strike	Premium	Collateral	DTE	Annualised yield on capital
A	$45	$0.60	$4,440	30	~16.4%
B	$90	$2.10	$8,979	45	~19.0%
C	$28	$0.35	$2,765	21	~22.0%

By premium collected, B "wins" ($210). By yield on premium they're all near 100% and indistinguishable. By annualised yield on capital, C is paying the most for your money's time — and that's the flag to go investigate, because it's also telling you the market is most nervous about C. The number ranks the candidates; it doesn't decide for you.

The fat-premium trap

Here's the discipline that keeps yield on capital from becoming its own trap: a high yield on capital is the market pricing in fear. The richest premiums cluster on the names heading into earnings, the ones with a lawsuit in the headlines, the ones the market thinks are about to fall. You're not being handed a better deal — you're being paid more because you're accepting more downside. That fear shows up name by name in the premium, and market-wide in the regime you're selling into — a rich yield reads very differently in a calm uptrend than in a fragile, falling tape.

So the number is a starting question, not an answer:

• It's excellent for comparing comparable candidates — same kind of business, same conviction, different strikes or expiries.
• It's dangerous for comparing across conviction — a 22% annualised yield on a company you'd never own is not better than 14% on one you'd happily hold. It's worse, dressed up.

The yield tells you what you're being paid. Only fundamental analysis tells you whether the risk you're paid for is one you want.

The "if" in annualising

Multiplying a 30-day return by 12 assumes you can find the same trade, at the same terms, twelve times a year. Sometimes you can. Often you can't — the premium was fat because of a one-off event that won't repeat monthly, or you get assigned and your capital is now tied up in shares rather than free to re-deploy. Treat the annualised figure as a rate, the way an interest rate is a rate: useful for comparison, not a forecast of a year's return.

And measure it against the real alternative. If your secured cash would otherwise sit in a money-market fund at 4-something percent, the honest question isn't "is 16% good?" — it's "is the extra yield worth the downside I'm taking on to earn it, versus doing nothing?"

Measure it in the currency you actually spend, too. A yield computed in USD is the wrong number if your costs are in SGD — currency drag quietly takes a slice of every wheel run from Singapore, and it never shows up on the trade log.

Where capital efficiency comes in

Once you're measuring yield on the capital, a sharper question appears on its own: can I earn the same yield while tying up less capital? (Answering that across a whole book, rather than one trade, is what our premium optimizer is for.) That's the whole idea of capital efficiency, and it's where the wheel stops being one trade and starts being a portfolio decision:

• A cash-secured put vs a put spread trades away some premium to cap the collateral — often lifting yield on capital while defining the maximum loss.
• Running several positions against a shared pool of collateral, rather than fully securing each in isolation, changes the denominator across the whole book — this is exactly what portfolio margin does, and why the buying power it frees up is really leverage in disguise.

Those are the levers that separate "a nice premium on one trade" from "more yield from the same balance sheet" — and they only become visible once you've stopped looking at the premium and started looking at the capital.

How it fits the bigger picture

Yield on capital is the first number to internalise because it reframes the whole strategy: selling a cash-secured put isn't about the premium, it's about renting out your capital and its willingness to buy a stock. The premium is just the rent cheque.

Making any single number this central carries a trap. The metric you see every week becomes the metric you optimise, and a goal that started as "a durable income at a risk I can survive" can decay into chasing the number on the screen without you ever deciding to change course. Yield on capital is the right number to lead with. It is still a proxy, and proxies drift.

At levelbox.ai the screener leads with exactly this figure — the annualised yield on the cash you'd actually secure, shown beside the breakeven and the maximum loss — so the comparison stays honest and the temptation of the fat premium is met immediately with the size of the position behind it. It's educational tooling to inform your own decision, not investment advice.