Let me state unequivocally that I really love the annualized metric.

But it's important to be clear on what the annualized metric does and what it doesn't do.

I like to think of calculating your annualized returns as a sort of money speedometer.

The annualized metric basically tells you how fast your money is making more of itself - the duration tells you how long of a road trip it went on.

But There Are Some Important Caveats . . .

#1 - When the holding period is really abbreviated, the annualized figure gets artificially skewed to the upside.

The calculation is still accurate, of course, but the issue is that the sky high annualized ROI is just not going to be sustainable over longer time periods.

Case in point - another short put trade we did inside The Leveraged Investing Club around the time of the ORCL trade involved XLNX.

The original terms were 30.20% annualized over 21 days until the expiration date, but because I was able to lock in so much of the potential gains in just 7 days (this stock spiked higher as well) the final annualized ROI exploded to 71.50%.

#2 - When we close a trade early so that we lock in the bulk of a trade's potential returns in an abbreviated holding period, yes, our annualized return will typically jump quite a bit.

But we're actually banking LESS in terms of total dollars.

We saw that with the ORCL trade above.

When we close a successful short put trade early, by definition, we're leaving some amount of money on the table.

The real value and benefit of closing a trade early and jacking up your annualized rate is that it frees up your capital way ahead of schedule to go out and repeat the process.

And in that regard it can - and often does - lead to more total return dollars because you're able to target more opportunities.

#3 - Beware of dishonest scammers who use the annualized metric deceptively and try to leave you with the impression that they're talking about total returns, not annualized.

Not cool.

I've even seen one marketer leave off the "annualized" designation in a subject line when bragging about her amazing ROI on a trade.

Could've been an oversight, but I doubt it.

Inside the Leveraged Investing Club, we target 15-25% annualized returns, and our typical trade durations are initially set up in the roughly 3 week to 45 day time frame.

And I'm always very clear that I'm talking about annualized, not total returns.

#4 - Since we're on the topic of option trading scam artists, another red flag is when someone touts their tremendous total % returns on a trade, but they do so on an artificially low capital base.

For instance, on a real percentage basis, you can make a killing trading credit spreads because these require very little capital to set up.

But if you want these levels of gains across your entire portfolio, you're going to have to put a substantial amount of your capital at risk.

(And don't kid yourself - there are very real risks to credit spread trading where, if you're wrong, your ability to repair is limited and often your best hope is to simply try to limit the damage as much as possible.)

And so I return to the annualized metric . . .

As long as you calculate your annualized returns on a realistic capital base, and as long as you recognize the limitations of the metric on very short durations, you should be good to go.

To me, it's a very accurate and very quick way to evaluate a trade.

Going back to the speedometer analogy, it doesn't matter what kind of vehicle you're driving, what color, what model year, whether you have passengers, the conditions of the road, the time of day or night, what's playing on the radio, or anything else equally irrelevant.

There are only two things that matter:

• How fast are you driving?
• And how far is it from Point A to Point B?

Finally, if you'd like to learn more about calculating your annualized returns, and how to actually go about doing that, you can check out this site article.

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