Return On Capital

Return on capital (ROC) is a way of measuring how much profit a trade could generate relative to the amount of money you had to tie up to place it. Instead of just asking "how much did I make," it asks "how much did I make for every dollar I risked or set aside."

In practice, you calculate it by dividing the profit (often the maximum potential profit on the trade) by the capital required to open the position, then expressing that as a percentage. For a stock trade, the capital required is usually just the price you paid for the shares. For an options trade like a spread, the capital required is typically the margin requirement — the amount your broker holds aside as collateral because of the risk in the position — rather than the full value of the underlying stock.

The nuance that trips people up is that "maximum" return on capital assumes everything goes perfectly and you hold the position to its best possible outcome, which often isn't what happens in practice. It also doesn't account for how long the capital was tied up. A trade that returns 20% over three days is a very different result from one that returns 20% over three months, even though the ROC figure looks identical. Comparing ROC across trades only makes sense if you also consider time and risk.

Because the capital required can be defined differently depending on the broker, the strategy, and the platform, two people can compute "return on capital" on the same trade and get different numbers. It's a useful comparison tool, not a single standardized figure.