Skip to content
All library documents

Measuring Option Strategy Returns with Margin Capital

Article Quant Q&A · Author: hotsource
Read the original

Summary

The question asks how to calculate returns and a Sharpe ratio for a systematic options strategy that may open positions with no net premium paid. The response emphasizes that zero initial cost does not mean the strategy requires no capital: the trader must post initial margin and have additional funds available to meet maintenance margin if losses occur.

It recommends selecting a sensible capital base and measuring profit and loss against that amount. This gives a practical denominator for computing returns and comparing performance while optimizing strategy parameters. The answer does not specify how to choose the capital amount, account for changing margin requirements, or handle cash flows over time. Results can therefore depend materially on the assumed capital allocation, and the brief response does not provide a complete Sharpe-ratio methodology.

Key ideas

  • A zero-premium options position can still require substantial trading capital.
  • Include initial margin and liquidity for possible maintenance-margin calls in the capital base.
  • Choose a defensible starting capital amount and calculate returns relative to it.
  • The document leaves capital selection and changing margin needs unspecified.

Tags

OptionsRisk managementBacktesting
Full text
# How to measure the performance of an systematic option strategy


# How to measure the performance of an systematic option strategy












I have a strategy based only on option instruments and I am trying to measure its performance to optimize some parameters. But how does one measure the performance of such strategies?

For Sharpe ratio calculation how do we calculate the return rates? For example, on one day the strategy is to buy and sell some options and its zero cost up front, the strategy made some PnL. What should be the return rate for this period?

## Answer by jokerjoe (score 1)

https://quant.stackexchange.com/a/17775

It's not a zero cost as you need to pay the initial margin and should have some extra cash in case you go below maintenance margin. You need some cash to trade, pick a sensible amount for an initial figure and measure against that.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.