Yes. You can make it something simple like always take your withdrawals or add money on the first of every month, then those additions will be traded for that month and used in your calculations, and any withdrawals will not be traded that month and not used in the calculations.
Knowing your ROC tells you a lot of things about your risk and liquidity parameters. In fact, ROC and risk-adjusted ROC are so important that many PMs calculate ROC for each sub-strategy separately. E.g. if you have a relative T/S book, a relative gamma book and a relative skew book, they would calculate ROC for each book separately and a joint ROC on the whole portfolio.
Not going to disagree with you, but I was asking him as a non professional with a five figure account of just his own personal money not investing for anyone else nor having any aspirations of investing for others or working for anyone else. In that case, you can calculate the returns as you wish, that was my point. If, as I suspected, he planned to show those results to anyone at some point then he has to be careful and meticulous in calculating his returns. I think we are all on the same page at this point. As one of the few pros here, I would appreciate it if you would share some specifics with us as to what you have observed from other professionals. What are average margin to equity ratios and ROC you have seen?
I've seen a pretty wide range. Personally, i feel comfortable having capital usage of 50% or below - it's especially true in the OTC setting where the dealers/PB could switch the rules on you overnight. Also, the general thought is that if you are running a net long risk premium book you could afford higher capital utilization as your margin call probability is lower. A guy I know came up with a heruistic for the capital usage allowance based on the "order of risk" and his understanding if he is a provider or a taker of liquidity. In terms of ROC, I'd say a realistic number is from 10 to 25 percent on a large capital base. Anyone who is generating higher ROC is probably selling tails in one or another form. If you do a lot of "busy work" - e.g. have a lot of different strategies (possibly in multiple assets or asset classes, probably on much lower capacity), you can have much better numbers. E.g. someone can serve as a liquidity provider in small cap stock options and make 100% and higher ROI, but your capacity would be a hundred thousand.
Thanks for your insights. When you say "capital usage of 50% or below" do you mean that if I have 100k cash in my account my options margin requirements should be no greater than 50k? In addition, if due to market fluctuations the margin requirements go higher than 50k (say, 60k - 65k) would you close the positions that adversely affect the margin just because it is above the 50% threshold or the 50% threshold is set in advance to allow for such fluctuations and as long as they don't get into a dangerous range you will be fine with it?
Exactly. A the trade inception time, you want to be using only 50% or less of your total capital for margin. In most cases, I'd let it be. Volatility trading is a lot about reversion to mean and you do not want to cut your positions at the worst possible time. The whole idea of having some cushion of capital is that you want the stop-loss decisions to be value rather then capital driven.