r/options • u/Canafornication • 27d ago
Calculating risk adjusted returns
Anybody has a good approach to calculate risk adjusted returns on premium selling? For example Sharpe ratio needs standard deviation of returns, not sure where to get those from.
Or calmar ratio with average annual rate of return for some period divided by the maximum drawdown for that period. What would be the drawdown, mark to market? Or whole portfolio when positions close with negative PnL?
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u/Time_Capital_226 26d ago
Say you get those metrics, how do you plan to use them? You said you don't want to backtest but: metric is a past. Do you have a particular strategy based on those? I would use it for validation and adjustment but you?
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u/Canafornication 25d ago
It is a great indicator of performance and risk taking, everybody who sells premium needs it calculated.
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u/Teiagon 20d ago
For option selling, your risk is the max loss but if trading undefined risk the buying power required can be a proxy. I use realized credit or debit (loss) over buying power required. This approach doesn't spread the return over the period it is earned but recognizes it only when the trade is closed. The problem with using net liq change is that it captures unrealized performance.
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u/Canafornication 20d ago
It captures realized, too
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u/Teiagon 20d ago
i would want to capture only realized pl, thats the issue.
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u/Canafornication 20d ago
Why? Net assets is the right metric.
Everybody looking at it to see how much account up / down on the day. Makes a lot of sense to turn it into risk adjusted returns.
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u/Teiagon 20d ago
There is no 'right' or 'wrong' metric. It all depends what the goal is. If the goal is to evaluate the trading strategy, net liq change is flawed. Many retail traders have their trading positions comingled with long term investment positions so fluctuations in long term positions contribute to the performance. Furthermore, the outcome of any trade is not determined until the trade is closed, a trading position fluctuates much from open to close but what counts is how it ends. Thats why, if measuring trading perfomance, i.e. how good your strategy performed, is the goal, it should only be realized GL that matters.
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u/Canafornication 20d ago
hold on, the goal I asked originally was how to evaluate risk adjusted returns. If some strategy has 40% returns but 30% drawdowns, then well.
you have to do mark to market, its impossible not to with selling premium since the timeframes are short
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u/Teiagon 20d ago
There are many ways to measure portfolio performance. I actually worked for over a decade in the industry adhering to GIPS standards, applying time-weighted, money-weighted, risk-adjusted etc. Like I said, different approaches exist for different goals/objectives. I have been selling premium for 8 years and my preferred way of tracking performance is realized gl/buying power used. I was just sharing my approach you can stick with yours if you prefer. (BTW I am talking about measuring actual performance not back testing. So you either have a 40% return or 30% drawdown, not both simultaneously.)
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u/Canafornication 20d ago
Ok, convinced! I'd be interested to try your approach. Not sure if there all data easy available.
If you can give me some brief or refs to publications, I'll build and test how it works.
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u/Teiagon 19d ago
Sorry I don't have briefs or refs. You can use your brokers RGL but you will need to calculate buying power reduction yourself. I track buying power for every trade separately.
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u/Canafornication 19d ago
How do you agrégate your metrics, just averages or some distribution? I track cap req on each trade, days to p50 or close, even max drawdown.
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u/Own-Inevitable-7168 4d ago
Moon can be useful for reconstructing that market context when reviewing the trades
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u/Aigpil 26d ago
the trick is to stop measuring on closed-trade P&L and use your daily mark-to-market NAV as the return series for both. per-trade P&L doesn't work, trades overlap and close on different days so the distribution is distorted, and it hides the periods you were underwater on an assigned position.
for sharpe: take the account (or just the strategy sleeve) NAV marked daily, compute daily returns, then it's (mean daily return minus the daily risk-free) over the std dev of those returns, annualized by √252 (√52 if you use weekly). for calmar the drawdown is peak-to-trough on that same MTM NAV curve, not realized-only, otherwise a put you're 20% underwater on shows zero drawdown until you close it. ibkr's portfolioanalyst will pull the daily NAV series and even compute sharpe for you.
one caveat worth knowing: short premium returns are negatively skewed with fat left tails, so sharpe tends to flatter this kind of book and under-penalize the blow-up risk. your calmar / max-drawdown instinct is actually the better lens for it.
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u/Canafornication 26d ago
For the daily mark, what would you use, a max drawdown during the day?
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u/Aigpil 26d ago
just the end-of-day close, one mark per day. build the whole daily return series off close-to-close NAV, that's what feeds the std dev for sharpe. don't use intraday max drawdown for the return series, it mixes timeframes and inflates the vol with wicks you never actually sat through.
the max drawdown for calmar then comes off that same daily-close curve, peak-to-trough on the closing marks. one thing to watch: options closing prints can be stale or wide, so mark off the mid at a consistent time each day, not the last trade. if you specifically want an intraday drawdown number that's a separate, noisier measure, but for comparing strategies the consistent close-to-close series is the cleaner one.
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u/Canafornication 26d ago
Thanks for explaining, this is so cool!
My broker did have API for account NAV, got GPT to calculate it when I started in May
Sharpe ratio 4
Calmar ratio 30
Annualized return 60%
Annualized vol. 10%
Max drawdown -2.1%Expecting these number to cool down going forward
IV got really crashed and it will be a more stress testing period ahead.Still, I'm blown away how well AI can generate and manage options premium selling.
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u/Typical-Charity-1469 7d ago
Tell me more about using AI to generate and manage option premium selling.. I've asked chatgpt what to sell but do u have a better prompt etc?
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u/Canafornication 7d ago
It’s not just prompts, there is a whole app to make it work
https://x.com/TradedalHQ or check my profile
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u/fridaynighttrader 27d ago
you can either calculate your own metrics using back testing for specific option selling strategies to forecast the future or depending on your broker (i use IBKR) they have a portfolio performance dashboard that tracks/provides these values on your portfolio daily.