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I believe that many options sellers consider return = return on risk, not return on capital. So if you have $100k in capital and you have 10 winning trades where you risked $10k per trade and made $1k each, that's a 100% return on risk (10 trades * 1k gained per trade on a risk of 10k = 10k) but return on capital is only 10%. That's because the risk, if measured (naked call options can theoretically have unlimited risk), the risk/reward reward ratio in options selling usually requires a lot more risk than reward but it's usually OK, if managed properly, because the win rates are usually very high. But if you're trying to raise capital for others to invest in they're going to measure return as return on their capital, every last cent that they place with you. This is why there aren't a lot of CTAs or hedge funds that are solely options sellers because they are collecting pennies in front of steamrollers and the portfolio volatility can be too painful with just one or two slip-ups.
Trading is my sole source of income since 2001 so I don't add any additional funds to my trading account. But I do make withdrawals for living and taxes.
Sorry, let me clear that up. By "increase size" I did not mean adding funds to your account, I meant trading larger volume. If your figures are % return on capital, then the size of the account on the first trading day of the year would impact the results for the year, so I was trying to understand if your account grows year to year or if you keep the same size.
XIRR works quite well from a practical point of view. The numbers however won't quite agree to actual return for the year.
The most accurate way to calculate your returns would be to use CAGR. However, once you start adding and withdrawing capital, things quickly get complicated. To correctly account for this, you would need to assign "shares" and a "NAV per share" to your equity. As an example, a $10,000 account could be assigned a NAV per share of $10 and then you would have 1,000 shares (10 * 1,000 = 10,000). If the account now has $1,000 profit ($11,000 total account value), then the NAV per share would be $11 ($11,000 / 1,000 shares). Withdrawing that $1,000 would then decrease your number of shares by 90.9091 (1,000 / 11). You should use fractions to guarantee accuracy of the NAV per share.
Thus, based on the above, NAV per share is affected by performance and your number of shares are affected by deposits / withdrawals.
You would then calculate CAGR on your NAV per share and this will give the most accurate representation of your returns. The math for CAGR can be found on Ed Seykota's Trading Tribe website. I can't recall if XIRR overstates or understates vs CAGR as it was a long time ago that I changed over for my accounting. However, using XIRR in Excel is just a lot less complicated.
