Why don't we open it for discussion? I've been doing some extensive testing on a certain premium selling strategy and this is the "problem" I run into. Using more than about 20% of the capital creates huge drawdowns, when you hit a losing streak.
Hmmm, I would call that a 10% return. You invested $10K and you got the $10K back plus another $1K. I'd take that any time.
The less volatility you want, the more excess cash you are going to have. Of course, your average r/r needs to be in check and that can vary from style to style. Since i am always short gamma, i usually carry 100-110% in cash. In my opinion, leverage isnt necessary to achieve above average returns unless you are selling cheap gamma.
TS, Many different approaches.... I've been playing around with selling back month positions to purchase front month curvature... then playing the swings to capture DELTA movement. It does present emotional risk... but allows for breakout protection. M~
I remember reading from one of the threads that you don't want to use haircut margin and only reg-t, so I assume you meant 100-100% cash but not that in buying power. Am I correct in my assumption?
Ditto. Although some would argue that when basing a strat primarily around derivatives, a trader is inherently leveraged. Not that I agree with that mentality.
Mark summed it up well. We traditionally looked at return on risk... or depending on the strategy, return on margin. I actually look at three profiles now. Return on Risk, Return on Margin, and with HairCut, we're getting a flavor for Return on Capital. An entirely different approach. M~
That is different from the way I have been utilizing my capital, but it is interesting nonetheless. Can you give an opinion of an optimum (in your opinion) % of capital invested, and the r/r ratio desired of that invested capital?
You want another idea that I learned a while back from my professor in a "Capital Markets: hedge fund/private equity" course? Develop a strat that is non-correlating with the broader market. Then they really love you. A huge portion of hedge funds out there are simply leveraged long only funds. An investor can find thousands of funds that show high correlation with the broader market. What they need to find is a fund that is non-correlated but produces returns greater than a money market fund. This balances out their port better.