Sharpe Ratio as a measure of performance

Discussion in 'Options' started by blcdoc, Feb 16, 2010.

  1. blcdoc


    Hi all.

    I am interested in why so many people here are using Sharpe Ratio as a measure of their performance in options trading.

    It was my understanding that this performance measure is not appropriate when there is an asymetric distribution of returns... which by their very nature options will produce.

    This ratio can be very easily be manipulated by what strategy that you choose to follow... and certainly should not indicate one trader's superior perfomance to anothers.

    Thank-you for your replies.
  2. heech


    Sharpe Ratio is an exceptionally poor number for evaluating option strategies, especially for option sellers (since numbers will be hugely inflated).

    But frankly, there can be no good metrics to be used when measuring option selling "skill". You can't look at monthly returns and distinguish between whether someone actually has an edge, or is merely trading far out on the probability distribution and has yet to crash.

    This is a well known problem with option selling strategies in general, and why many institutional/experienced funds find it difficult to allocate funds to managers promising option selling strategies.

    To determine whether someone is "good", you really have to ignore the historical performance (unless it spans... I don't know, 2-3 decades), and focus on the specifics of what they're doing.