We're starting to reach an agreement here, more or less we speak the same Latin so far: https://www.elitetrader.com/et/thre...ciation-around-the-world.371844/#post-5743649 What I'm arguing about is whether that denominator is really $1 or actually zero. 100% return isn't bad, but can't compete with infinity, right?
Keep it simple,you have 100 bucks in your account..You made 5 bucks.. Yeah,you can look at levered returns and/returns on margin,but that's just smoke and mirrors. if you are running money,including your own, what did you bank on your trading capital.That is the real question.No one asks what's you return on margin/leverage first.Thats for the smart guys to ask assuming the returns pass the sniff test See LTCM
Quick answer is the net P&L for the whole trade divided by the Value at Risk. But given the emphasis on hedging in the example, if you believe that markets are efficient and can hedge the position perfectly, any profit from the long put will be equal to the loss on stock, so the successful trade would provide zero profit whatever metric is chosen as a denominator.