Thank you FV and ChpBstrd, for your thoughts and explanations.

I have just modeled a simple bear put debit spread, spanning two strikes, a 12 strike for the long put, and a 10 strike for the short put, having a duration of about 1 month. I'm using after hours quotes, so there might be some wonkyness there. Also, I'm assuming both puts can be bought/sold at the midpoint between bid and ask.

The intent of the model is simply to ride this spread through expiration 12 times a year, adjusting each subsequent month's spread to be +1 and -1 from ATM; the classical bear put debit spread.

With those assumptions, you can put this spread on for a net 0.57 debit. This is your defined risk.

If both contracts expire in the money, you collect a net $2.00 after exercise (a net $1.43 profit after the debit to enter the position).

If both contracts expire out of the money (e.g., a volatility event) you lose 0.57.

If only one contract is in the money at expiration, then you exit with something less than a 0.57 loss. For this scenario, you need to make sure you have enough cash or margin in the account for your broker to buy the underlying so as to assign it with the long put. For the sake of simplicity, I'll declare this an outlier event, and ignore it.

I'll be damned if I can figure out an annualized return on this, but let's use "risk" as the denominator, and the net profit after the debit to enter the position, less the debit again, as the numerator. This assumes a 50/50 win/lose ratio.

So if you win this speculation 6 months out of the year, and lose it 6 months out of the year (which seems to be a highly conservative assumption), then your *"annualized return"* (defined as return on risk) is a tad over 150%.

If you win more often than you lose, then your annualized return goes up correspondingly. You can lose this trade 8 out of 12 months, and still eek out a 25% annualized gain (using realized losses in place of risk, and realized profits, net of losses, in the calculation).