Cap Rate vs Options Yield: Why the "Same Number" Means Very Different Things
What's in this guide
1. The trap: comparing two yields that mean different things 2. What cap rate actually measures 3. What options yield actually measures 4. The apples-to-apples version 5. The leverage adjustment 6. How I use both numbers in practice 7. Next stepsIf you’ve bought a rental, you know what cap rate is. If you’re new to options, you’ve probably seen "annualized yield" or "return on capital" numbers thrown around and either dismissed them as hype or taken them at face value. Both are mistakes.
This post is the framework for comparing yields across the two worlds without lying to yourself.
1. The trap: comparing two yields that mean different things
A duplex has an 8% cap rate. A cash-secured put on PFE has an 18% annualized yield. Does that mean the PFE trade earns you 2.25x the duplex? No — not even close. The two numbers aren’t calculated the same way, aren’t net of the same costs, and aren’t taken on the same risk.
Here’s the cheat sheet before the deep dive:
| Cap rate | Options yield | |
|---|---|---|
| Numerator | Net operating income | Premium collected |
| Denominator | Property purchase price | Collateral (strike × 100 for puts) |
| Net of debt? | No — pre-debt | No debt in cash-secured |
| Net of taxes? | No | No |
| Net of time? | No | No |
| Annualized? | Yes (by definition) | Only if you remember to annualize |
| What it answers | "If I paid all cash, what return would the property throw off before financing?" | "If this one trade works, what rate of return does my collateral earn?" |
Different questions. Different numbers. Treat them that way.
2. What cap rate actually measures
Cap rate (capitalization rate) = Net Operating Income / Property Price. NOI is rent minus operating expenses (taxes, insurance, management, maintenance, vacancy), before debt service. It’s meant to be an unlevered yield — the baseline return the asset itself produces, independent of how you finance it.
Example: a $400k fourplex that nets $32,000/yr after expenses but before debt has an 8% cap rate.
- What cap rate tells you: is this asset priced in line with other similar assets in the market?
- What cap rate does NOT tell you: what you’ll actually take home monthly. Your mortgage, your rate, your taxes, your capex — those come out of the 8%, not on top of it.
3. What options yield actually measures
When someone quotes "18% annualized" on an options trade, they almost always mean:
- Numerator: premium collected (e.g., $45 for a 30-day PFE $25 put)
- Denominator: collateral required ($25 × 100 = $2,500 for one cash-secured put)
- Then annualized: ($45 / $2,500) × (365 / 30) = 21.9% annualized
This is an unlevered return — the collateral is cash you set aside, no borrowing. It assumes the trade works out (either expires worthless or you keep the shares at your target price and sell covered calls on them). It does not include taxes, commissions, or the chance that the stock craters.
- What options yield tells you: what rate your collateral is earning on this specific trade if the trade plays out as planned.
- What options yield does NOT tell you: whether the trade actually plays out as planned, or whether a market-wide shock marks your collateral underwater for months.
4. The apples-to-apples version
If you want to compare these two numbers honestly, both have to be stripped of lie-making assumptions and expressed as expected annual cash return on the capital you tied up.
Cap rate → true cash-on-cash
Take the 8% cap rate fourplex. Say you put 25% down ($100k) and borrow $300k at 7% for 30 years.
- NOI: $32,000/yr
- Debt service: ~$23,960/yr
- Cash flow: ~$8,040/yr
- Cash-on-cash: $8,040 / $100,000 = 8.0% on your actual capital
That’s the honest "yield on money you put in." Not the 8% cap rate — the 8% cash-on-cash after debt. Only coincidentally the same number here; often it’s lower.
Options yield → realistic annual run-rate
Take the PFE example at 21.9% annualized per trade. Over a year, you probably run that collateral in 10-11 trades (some get assigned, you sell covered calls, cycle repeats). Realistic annual run-rate on a disciplined wheel:
- Gross premium collected: ~15–20% of collateral
- Minus commissions: ~0.5%
- Minus one bad trade/year that costs 2–3% to roll out of
- Realistic net annual yield: ~12–16% of collateral
Apples-to-apples: 8% cash-on-cash on the fourplex vs 12–16% on the wheel, both on $100k of actual capital, both pre-tax, both excluding appreciation/capital changes.
5. The leverage adjustment
The elephant in the room: the fourplex only generates its 8% cash-on-cash because of 3-to-1 leverage. The wheel, as run cash-secured, has zero leverage. If we strip leverage from the fourplex, its true unlevered cash-on-cash is more like 2.5–4%.
| Comparison | Fourplex (levered 3:1) | Fourplex (all-cash) | Wheel ($100k cash) |
|---|---|---|---|
| Pre-tax cash-on-cash | ~8% | ~2.5–4% | ~12–16% |
| Scales via leverage? | Yes (that’s the whole trick) | N/A | Rarely — margin kills the strategy |
| Appreciation on paper | +2–4% of total property value (not your cash) | +2–4% | 0 |
| Principal paydown | +2–3% of loan | N/A | 0 |
6. How I use both numbers in practice
When I’m thinking about a rental, cap rate tells me whether the deal is priced sensibly against similar nearby deals. Cash-on-cash tells me whether I’ll actually be able to pay myself anything. One is market-level, one is deal-level.
When I’m thinking about an options trade, annualized yield tells me whether this specific trade is worth tying up collateral for 30-45 days vs. doing something else with the money. Realistic run-rate tells me whether my overall account is on pace for the ~15% that’s the point of running the strategy at all.
Never, ever stare at a 21% annualized options yield and conclude "this is 3x better than the rental." You’re not comparing like with like. Rebuild both numbers to cash-on-cash-after-taxes-and-time before you make any portfolio decision.
7. Next steps
If this framework was useful and you’re ready to see the wheel’s per-trade math in plain English — strike selection, premium ranges, assignment math — grab the free Omega Wheel Starter Kit. It has one complete worked example end-to-end.
For the mechanics of why we size positions by percent-of-account rather than by dollars, see position sizing for the wheel.
Run the numbers on your own account
The free Omega wheel calculator lets you model a full year of premium, cost-basis reduction, and assignment outcomes on any account size — before you sell your first put.
Try the calculator → Free Starter KitFrequently asked questions
Is cap rate a useful metric for comparing to options at all?
Not directly, but it is the baseline unlevered return of a real asset — the right thing to put next to an unlevered wheel return. If someone shows you a 6% cap rate deal and claims to be comparing it to a wheel that generates 15%, the comparison is honest in its unlevered form.
Why do people quote the levered cash-on-cash return on rentals but the unlevered return on options?
Real-estate culture built around leverage because leverage is where most of the structural wealth comes from. Options culture emphasizes cash-secured because levered options can wipe accounts in a single bad week. The two worlds developed opposite defaults, and neither one is wrong — they’re just answering different questions for their own practitioners.
Can you use margin to levered-up the wheel?
Technically yes — you can run naked puts or portfolio-margin cash-secured puts and get 5-10x gross exposure. We do not recommend this for anyone new. The whole point of the wheel is survivable monthly cash flow; leverage breaks survivability in bad markets. See our wheel vs naked puts write-up.
Is NOI (used in cap rate) a reliable number from sellers?
Rarely. Sellers tend to understate repairs, overstate occupancy, and omit management fees entirely. Always rebuild NOI from first principles yourself before using a seller’s cap rate as a reference. Same discipline applies to the wheel — don’t trust someone’s "annualized" number without seeing their actual trade log.