1) I sure hope to maintain the record, but even I doubt I will.
2) I heard somewhere that option writing, which makes up a large part of my portfolio, tend to have unusually high Sharpe ratios for some reason.
Did I do my Sharpe ratio wrong?
- Thread starter SoCalOptionsWriter
- Start date
1) I sure hope to maintain the record, but even I doubt I will.
2) I heard somewhere that option writing, which makes up a large part of my portfolio, tend to have unusually high Sharpe ratios for some reason.
Thanks everyone for the insights. I'm digesting it all.
Yes. In fact your Sharpe ratio and monthly win rate is very similar to Victor Niederhoffer who was famous for writing options but then blowing up on tail risk.
"February 2002 to April 2006 Niederhoffer's Matador record was a +338% gain, 41% net annualized.. and only 5 losses in 51 months, with a 2.81 Sharpe ratio"
But in 2007/2008 he blew up, and obviously after the blow up Matador was no longer 2.81 Sharpe anymore.
If you stay off the leverage and stick to making just 12% instead of 40%+ you should be ok. You might only get wacked with a 25% drawdown once a decade. Instead of blowing up completely.
Not getting greedy or having a big ego that wants to prove you are the best trader in the world like old Victor had.
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Victor was a huge risk-taker as his short options positions were mostly naked.
As long as your short positions are covered (credit spread), you'll be fine. You won't have the returns of Victor, but then again, you most likely won't blow up.
RE: "ego"...indeed remain humble.
If Vic was short the 85 percent spot put,what percent of spot put are you suggesting to buy,and what percent of the short put ctedit should one spend??..
Unfortunately,selling spreads comes at a large cost
Unfortunately,selling spreads comes at a large cost
Vic knew that....and that's why he refused to cover his naked short position....he wanted the "extra" return.
5 losses in 51 months is hugely different than 1 loss in 9 months.
Take a quarter out right now and start flipping it to see how trivial it is to get runs of 5 heads or 5 tails. You could even flip it enough to get 5 heads, 1 tail and 3 heads or the inverse. You won't flip a fair coin though 51 times and get 46 heads and 5 tails.
The 9.78 is because you are summing the returns but dividing by the square root of an average.
2+ is because you are arbitrarily multiplying the period sharpe that you actually have by 3.464101615
Over a 5 year period or so the annualized sharpe would be measuring the ability to adapt to changing market conditions. Taking 9 months and multiplying by 3.464101615 is just nonsense.
You can't compare a single trader putting on small amounts of bets in time to an algorithmic hedge fund like Medallion putting on thousands of market neutral bets in space either. It is not even close to the same thing. Thousands of market neutral daily bets in space is partially the secret sauce of what these funds are doing because it doesn't shatter every statistical assumption like a single trader putting on small amounts of bets in time does.
Take a quarter out right now and start flipping it to see how trivial it is to get runs of 5 heads or 5 tails. You could even flip it enough to get 5 heads, 1 tail and 3 heads or the inverse. You won't flip a fair coin though 51 times and get 46 heads and 5 tails.
The 9.78 is because you are summing the returns but dividing by the square root of an average.
2+ is because you are arbitrarily multiplying the period sharpe that you actually have by 3.464101615
Over a 5 year period or so the annualized sharpe would be measuring the ability to adapt to changing market conditions. Taking 9 months and multiplying by 3.464101615 is just nonsense.
You can't compare a single trader putting on small amounts of bets in time to an algorithmic hedge fund like Medallion putting on thousands of market neutral bets in space either. It is not even close to the same thing. Thousands of market neutral daily bets in space is partially the secret sauce of what these funds are doing because it doesn't shatter every statistical assumption like a single trader putting on small amounts of bets in time does.
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At the end of the day Medallion has about 90% winning months, and Sharpe of Ratio of about 2.5.
An outstanding retail trader can match those metrics, just with a different style of trading that is not scalable.
However i didn't know the OP was writing options when i compared his metrics to Medallion, that makes him more comparable to Niederhoffer in my eyes.
Who coincidently also had about 90% winning months and a Sharpie of 2.8 just before he last blew up.
But i agree it is silly of me to draw these comparisons from just 9 months of data.
OP here. I'm no Victor Niederhoffer, guys. Trust me. Know all about him. Believe it or not, at least at the moment, I don't touch short puts. All of my risk, with the trade being discussed here, is right tail. If the market soars 22 percent in a day, yeah, I'm in trouble. (It would require the dawning of the age of Aquarius or the Second Coming or something, I suspect.) But I'll take that risk. I won't take it on the left tail, however, with short puts. (A 22 percent one day decline just requires a Treasury Secretary uttering something stupid.) Of course, when the bull market starts up, I may have to trim this trade. But until then ...