SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Should You Care About The Sharpe Ratio?


The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such calculations. It was developed by Nobel laureate William F. Sharpe. The Sharpe Ratio is the annualized return of an investment earned in excess of the risk free rate divided by the investment's annualized volatility.

"A lot of folks just look at the return side of the equation," says Wasif Latif, vice president of equity investments for USAA Investments in San Antonio. "But how smooth was your ride to get to that return?" The Sharpe ratio puts those two pieces together.

 

When building a portfolio, the objective is to merge your plan with reality. We want all the return with none of the risk, and it's why a fraud like Bernie Madoff fooled investors for decades. We desperately want to believe in fairy tales, often self-sabotaging our own returns by pursuing unproven complexity over proven simplicity. It's the triumph of hope over experience.

 

plan v reality.gif

 

For perspective, a Sharpe Ratio of 1 over a long period of time (decades) is extremely rare for any investment or investment portfolio. Just go out and try to find them. Be skeptical of anyone suggesting they can achieve, or have achieved, extraordinarily high Sharpe Ratio's. Here's an example of the Sharpe Ratio of the S&P 500 since 1990:

 

Annualized Return: 9.36%

Risk Free Rate (T-bills): 2.87%

Annualized Volatility: 14.61%

Sharpe Ratio: 0.44

 

And here's a picture of that reality, from www.portfoliovisualizer.com. 

 

S&P 500.png

 

One simple way to increase your portfolio's Sharpe Ratio is with diversification. For example, moving half of a portfolio into a bond index fund, and rebalancing annually, has done a nice job of improving your Sharpe Ratio from 0.44 to 0.70 since 1990. Note how much smoother the portfolio growth would have been. Investors would be well served if the finance industry would start showing people a track record instead of simply providing numbers. Just giving investors a bunch of numbers doesn't help them understand the good, the bad, and the ugly of long term investing.

 

50.50.png

 

At this point, sophisticated investors could get creative and utilize concepts such as synthetic longs with option combos and momentum filters to further maximize risk-adjusted returns, but those are topics for another post and a point to discuss with a competent investment advisor. The point here is to help you think beyond returns to risk-adjusted returns the next time you review your portfolio or a potential investment. The Sharpe Ratio is one proven way to measure how much pain you've historically had to endure in order to achieve a certain gain. Sharpe ratios work best when figured over a period of at least three years, advisers say. 

Taking our Steady Condors strategy, you might ask yourself: is 17% CAGR (Compounded Annual Growth Rate) a good return? Well, the answer is - it depends. When this return is achieved with only 15% annual volatility - then yes, it's an excellent return. In fact, it is much better than 25% CAGR with 40% annual volatility. 

 

Our Performance Page presents Sharpe Ratios for all three our services. We encourage you to check it and compare our Sharpe Ratios to other services (assuming you can even find this info at other services).

 

Related Articles:
Are You EMOTIONALLY Ready To Lose?
Why Retail Investors Lose Money In The Stock Market
Are You Ready For The Learning Curve?
Can you double your account every six months?

 

If you are ready to start your journey AND make a long term commitment to be a student of the markets:

 


Start Your Free Trial

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 453 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 904 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 806 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 480 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 1,492 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 5,903 views
  • Call And Put Backspreads Options Strategies

    A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

    By Chris Young,

    • 0 comments
    • 9,501 views
  • Long Put Option Strategy

    A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

    By Chris Young,

    • 0 comments
    • 11,149 views
  • Long Call Option Strategy

    A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

    By Chris Young,

    • 0 comments
    • 11,530 views
  • What Is Delta Hedging?

    Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

    By Kim,

    • 0 comments
    • 9,673 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs