Leveraged PutWrite

If we have a series of returns per period {10,-20,30,-40} that we say are normalized to 100%, then the denormalized return values representing partial collateral, say 90%, would be {10,-20,30,-40}/.90 = {11.1, -22.2,33.3, -44.4}.

So, just divide the period return by collateral level. Good enough for back of the napkin.
 
xandman said:
If we have a series of returns per period {10,-20,30,-40} that we say are normalized to 100%, then the denormalized return values representing partial collateral, say 90%, would be {10,-20,30,-40}/.90 = {11.1, -22.2,33.3, -44.4}.

So, just divide the period return by collateral level. Good enough for back of the napkin.
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no. You can’t do that because of path dependency. If you drop 50percent of your money your next trade will be 2/3 the size of what it would have been if you only dropped 25percent.
 
newwurldmn said:
no. You can’t do that because of path dependency. If you drop 50percent of your money your next trade will be 2/3 the size of what it would have been if you only dropped 25percent.
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In other words, compounding effect. Correct?
 
Aha. So, if the sequence of period wins and losses are:

10 losses, then 10 wins
VS.
20 wins and losses in alternating fashion

We have significantly different numbers.
 
This answers my question, but seems to contradict @newwurldmn's point.

upload_2020-10-20_14-52-28.png




Those Russians, alwas have access to the best stuff :)
http://optionsoffice.ru/wp-content/uploads/2016/03/Goldman-Sachs_The-art-of-put-selling.pdf
 
There's no contradiction. As volatility increases, your leveraged return is going to experience an increasing amount of drag until it finally goes negative; while volatility still increases in a linear fashion. If selling ATM puts earns the same 0.65 Sharpe as your backtest and you lever it 3x, your 7.1% compounded return only increases to 14.8%. (Back out half of the variance from your arithmetic mean). A bit less actually if you do more math to account for the increasing negative skewness.

Also as PnL volatility goes up you open the door for greater dispersion of wealth outcomes via increased path dependency. I.e. three outlier losses are going to gut your capital a lot more and take much longer to recover from. So while your mean return on an infinite timeframe increases; it does so at the cost of adding more time to the horizon where your leveraged strategy outperforms the lower return / variance pair with 95% confidence interval in terminal wealth.
 
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