
Start Here
Platform

Tour
Bots 101How it worksLive demo
Tools
Automated tradingOptions backtestingWatchlist scannerPrivate community
Use cases
New investorsStock tradersActive tradersPassive investorsSwing tradersAlgorithmic traders

Templates
By trade type
Stock trading botsOptions trading bots
By strategy type
Bullish options strategiesNeutral options strategiesBearish options strategiesHedging strategies
By style
Active and high frequency botsEvent-based botsTrend trading botsMomentum trading botsStatistic and probability-based botsTechnical analysis botsEarnings strategy bots

Integrations

Pricing
Education

Courses
Overview
By experience
Beginner
What is an options contract?Stock trading vs. options tradingOptions contract specificsCall vs. put options basicsBuying options vs. selling optionsOptions profit and loss diagramsOptions pricing tablesOption moneyness (ITM, OTM, and ATM)Options pricing and the "Greeks"Options expiration and assignmentWhat's our "edge" trading options?Single vs. multi-leg options strategiesSmall account options strategies
Intermediate
Fearless, confident options tradingHistorical volatility vs. implied volatilityPredicting market movesTrade size and capital reservesPortfolio balance and beta weightingHow to choose the best options strategyHow far out to place trades?Strike price anchoring with probabilitiesTips on getting your trades filledAdvanced and contingent orders7 step options trade entry checklist
Advanced
Developing a daily trading routineHow to avoid "Black Swan" eventsAdjusting and hedging option tradesExiting options trades automaticallyOptions strategies we don't adjust (and why)Big picture adjustment strategyWhen to adjust or notAdjusting straddles and stranglesAdjusting credit spreads, iron condors, and calendarsSmarter stop-loss ordersBuilding a diversified options portfolioRolling options trades for duration and premiumOptions expiration week position checklistDealing with stock assignment and dividendsHow to free up trading margin and cash
By subject
Options basics
Why options vs. stocks?What is an options contract?Smart use of leverageOption strike priceOption premiumOption expirationOption contract multiplierProfit and loss diagramsLong call option explainedShort call option explainedLong put option explainedShort put option explainedATM, ITM, and OTM optionsCash vs. margin basicsHigh probability trading definedHow to buy a call optionHow to buy a put optionSingle-leg vs. multi-legWhat is the VIX?Is fundamental analysis dead?
Entering and exiting trades
Game of numbers7 step entry checklistStrong liquidity examplesPicking the next directionScanning for tradesOption pricing table basicsSetting up your trade tabPinning your probability of profitUsing delta for probabilitiesBuy to open vs sell to openBuy to close vs sell to closeMarket, limit, stop loss orders5 types of contingent ordersLimit ordersMarket ordersLimit on close ordersMarket on close ordersAdvanced contingent ordersTaking profits before expirationMechanics of rollingConsider future events
Options expiration
Options expiration explainedWhat is the Options Clearing Corporation (OCC)?Physical vs. cash settlement optionsAmerican vs. European style optionsWeekly options expirationWeekly expiration tags/codesOptions assignment processOptions exercise processTrading timeline (duration)
Bullish options strategies
Bull put spreadBull call spreadLong callShort putBull call backspreadPut broken wing butterflyCall calendar spreadPut diagonal spreadCustom naked putCovered callSynthetic long stock
Neutral options strategies
Short straddleLong straddleIron condorsShort strangleLong strangleIron butterflyUnbalanced iron condors
Bearish options strategies
Bear call spreadBear put spreadLong putShort callBear put backspreadCall broken wing butterflyPut calendar spreadCall diagonal spreadCustom naked callCovered putSynthetic short stock
Portfolio managmeent
No guaranteed tradesDon't do something, sit thereAccount size adjustmentsAvoiding stock market overloadStocks, indexes, & ETFsMonitoring positionsCreating automatic alertsIndividual stock betaPortfolio betaBeta weighting your portfolioUncorrelated industries/sectorsSystematic vs. unsystematic riskEfficient portfolio frontierLimiting undefined risk tradesEconomic calendarConcept of legging
Options pricing and volatility
How to find option price quotesUnderstanding the mathIV vs. IV percentileProbability of profit vs. probability of touchOption probability curveBid-ask spread definedIV expected vs. actual moveThe "Greeks"Fatal pricing errorsInverse ETFsOptions parity
Adjusting trades
#1 adjustment for any tradeWhen to adjust a tradeSingle options trade vs. overall portfolioLeveraging the analyze tabCall spread adjustmentsPut spread adjustmentsShort strangle adjustmentsIron condor adjustmentsShort straddle adjustmentsCalendar spread adjustmentsDebit spread adjustmentsButterfly adjustmentsUsing stop lossesDelta hedgingRolling positionsPairs hedging

Strategies
Long callLong putShort callShort putCovered callCovered putProtective putCollar strategyLEAPSBull call debit spreadBear call credit spreadBull put credit spreadBear put debit spreadLong straddleShort straddleLong strangleShort strangleCall calendar spreadPut calendar spreadIron condorReverse iron condorIron butterflyReverse iron butterflyCall butterflyPut butterflyStrapCall diagonal spreadPut diagonal spreadCall ratio spreadPut ratio spreadCall backspreadPut backspreadLong box spreadShort box spreadReversalStock repair

Topics
OverviewAsset allocationAutomated tradingBehavioral financeBrokersCandlestick patternsChart patternsDividendsEconomic indicatorsEquity investmentsExercise & assignmentFinancial analysisFinancial historyFinancial marketsFinancial modelingFinancial theoriesFundamental analysisFuturesInvestment accountsInvestment taxesInvestor biasesMarket holidaysMarket hoursMarket indexesMarket indicatorsMomentum tradingOptionsOptions pricingOptions settlementPortfolio managementRisk managementStocksStock marketTechnical analysisTechnical indicatorsTrading commissionsTrading platformsTrading psychologyTrend trading
Resources

Workshops

Podcast

Blog
Support

Help Center
Overview
Getting started
What is a bot?Creating a botAutomation typesAutomation editorBot dashboardBot positionsBot logTemplates and cloningKey conceptsSafeguards and limitsPower of botsBest practices
Bot automations
What is an automation?Scanner automationsMonitor automationsEvent automationsEditing automationsReusing automationsCopying automationsOrdering automationsUsing custom inputsBot level inputsAutomation statusesAutomations library
Bot actions
DecisionsOpen positionClose positionNotificationsLoop symbolsLoop positionsBot tagsPosition tags
Bot examples
Genesis 1.0 botGenesis 2.0 botGenesis 3.0 botTrend trading with stocks botPortfolio trend trading botTrend trading with options botMultiple moving averages botTechnical swing trading botTrend and momentum botWeekly credit spread botRecurring iron condors botThe "Honey Badger" botHybrid spreads botHigh IV rank iron condor bot
Decision recipes
Comparing underlying symbol priceEvaluating symbol typeComparing underlying symbol propertiesEvaluating underlying symbol performanceEvaluating underlying symbol standard deviationComparing underlying symbol price to an indicatorComparing multiple underlying symbol indicatorsEvaluating underlying symbol implied volatility rankEvaluating underlying symbol earnings reportingEvaluating underlying symbol price probabilityEvaluating underlying symbol probability within rangeEvaluating bot propertiesEvaluating bot available capital for opportunitiesComparing bot position count to position typeComparing bot position count to underlying symbolEvaluating bot position count to position type and underlying symbolEvaluating bot last position activityEvaluating bot last activity with underlying symbolComparing bot active orders statusComparing bot active orders status with underlying symbolEvaluating bot position availabilityEvaluating bot tagsEvaluating opportunity availabilityEvaluating opportunity return expectationsComparing opportunity attributesComparing opportunity leg attributesComparing opportunity bid-ask spreadEvaluating opportunity probabilitiesEvaluating position performanceComparing profit target to trailing valueComparing position time to expirationComparing position durationEvaluating position underlying symbolComparing position propertiesComparing position leg propertiesEvaluating position typeEvaluating position sideComparing underlying symbol price to position legEvaluating position tagsEvaluating underlying symbol indicator propertiesComparing multiple underlying symbol indicator propertiesEvaluating MACD technical indicatorComparing Bollinger Bands to symbol priceEvaluating stochastic technical indicatorComparing VIX propertiesEvaluating market time of the dayEvaluating days of the weekEvaluating bot switches
Position statement
Activity summaryPosition detailsTrade detailsOpened positionsClosed positionsCanceled positionsOverride positionsExpired positionsPosition historyManually open positionManually close positionImport position
Order pricing
SmartPricingFinal price settingsPosition summaryOrder detailsWorking ordersManual override
Bot templates
Creating new templatesUpdating existing templatesDeleting templatesSharing templatesUpdating shared templatesTemplate best practices
Cloning bots
Cloning existing botsCloning from templateCloning from shared template
Troubleshooting
Using bot logsTesting your botsNot enough capital warningDaily position limit warningTotal position limit warningPricing anomaly warningMissing or invalid input errorDaily symbol limit errorExcessive errors failsafeOverlapping strikes failsafePrice exceeds strike-difference errorOptions expiration protocolDuplicate orders errorOptions approval level errorBot event loopsStock splits and corporate actionsSupported browsersSupported countries
Community forum
Community guidelinesCrafting your introductionSending group messagesSending private messagesAttaching bot templatesReceiving bot templatesAttaching automationsReceiving automationsFollowing tradersPosting publiclyEditing posts and messagesSubscribed discussionsUsing bookmarks
Using backtester
Running a new backtestBacktesting results summaryModifying existing backtestsMy backtestsBacktesting research databaseTop backtestsBacktesting errors
Account settings
My profileTrading accountsConnecting to TDAmeritradeConnecting to TradeStationConnecting to TradierIncompatible accountsPassword managementSession timeoutTwo-step authentication
Technical docs
Infrastructure and securityAutomation structureAutomation behaviorData feedsOrder handlingTrade enforcementsBroker rejection errorsBot limitationsProfit and lossFair value pricingDecision propertiesDecision calculationsParameter selectionCalculating probabilityPlatform indicators

Contact
Send FeedbackReport IssueEmail Us
Option AlphaOption Alpha

LoginFree Trial
EducationPortfolio ManagementPerformance Metrics

Performance Metrics

There are multiple ways investors can track the performance of an individual trade or portfolio. Here is a look at 11 performance metrics.

Analyzing investment performance can help quantify the overall quality of investments in a portfolio, identify successful strategies, or highlight areas that need improvement. Performance metrics can be viewed individually or holistically to create robust systems and strategies.

Win Rate

The win rate divides the total number of winning trades by total trades. For example, if an investor has placed 200 trades and has realized a profit on 120 of them, the win rate is 60% (120/200).

Win rate formula

While the win rate can identify how successful trades are at generating profit, it is not as important as the profit factor, or how much is gained or lost on each trade. For example, an investor may have a 60% win rate, but if they lose 3x as much when they lose than they make when they win, they will lose capital over time.

Profit Factor

The profit factor divides the total amount of money gained by the total amount of money lost. Profit factor is important when used in conjunction with the win rate because it creates a more complete view of trading performance.

Profit factor formula

For example, if an investor has placed 200 trades with a win rate of 60% and averages $50 per winning trade and $50 per losing trade, their profit factor will be 1.5 with a net profit of $2000 ((120 x $50 = $6,000) / (80 x $50 = $4,000)).

Compare this with an investor who has a 60% win rate on 200 trades but a profit factor of .5 because they average $50 per winning trade, but $150 per losing trade ((120 x $50 = $6,000) / (80 x $150 = $12,000)). They will have a net loss of -$6,000, despite the same win rate.

Return on Investment (ROI)

Return on investment measures the effectiveness of an investment relative to its initial cost of entry. ROI divides the return of an investment by the cost of the investment.

For example, if an investment cost $5,000 to purchase and is now worth $6,000, the ROI for the investment is 20% ($6,000-$5,000 = $1,000 / $5,000).

ROI formula

Return on Margin

Return on margin is the net gain or loss of an investment relative to the required margin to initiate the trade. The return on margin is calculated by dividing the realized return by the initial margin.

Return on margin formula

For example, if a security cost $50,000 to purchase, and $25,000 of margin was used, a $5,000 return would have an ROI of 10% and a return on margin of 20%.

Return on margin can also take into account the interest rate paid on the borrowed capital.

Compounded Annual Growth Rate (CAGR)

Compounded annual growth rate measures the rate an investment would grow if it increased at the same rate every year, and the profits were reinvested at the end of each year. This is not typically realistic because investments generally do not have identical returns every year.

For example, if an investment returned $3,000, $500, and $6,500 over three years, the cumulative return would be $10,000, or $3,333 per year.

Let’s assume a starting capital of $10,000. The three-year return would be 100%; the average annual return would be 33%.

The CAGR is calculated by dividing the ending capital by the starting capital, raising that value to 1 divided by the number of years, and subtracting that total by 1.

Compounded annual growth rate (CAGR) formula

For this example, the CAGR would be 25.99%, or less than the annual return of 33%.

CAGR formula example

CAGR helps compare two uncorrelated investments and smooths out the returns over multiple years, despite the fact the year-to-year returns may vary significantly.

Sharpe Ratio

The Sharpe ratio, created by William Sharpe, helps an investor measure the return of an investment relative to its risk. The Sharpe ratio is calculated by subtracting the risk-free rate of return from the portfolio’s return and dividing the value by the portfolio’s standard deviation of returns.

Sharpe ratio formula calculation

The numerator is known as the portfolio's excess return. Excess return refers to any gains earned beyond the risk-free rate of return. The risk-free rate is typically represented by Treasury bills.

The Sharpe ratio helps to determine if returns are the result of sound investing or a product of taking on too much risk and can be used to evaluate past performance. The higher the Sharpe ratio’s value, the better the performance is relative to the risk required to generate the returns. Increasing the diversification of a portfolio often results in a higher Sharpe ratio.

Treynor Ratio

The Treynor ratio, developed by Jack Treynor, is a risk to reward measurement that investors can use to calculate and adjust a portfolio’s exposure to the unavoidable, systematic risk involved with investing.

The Treynor ratio uses a portfolio’s beta to determine its risk exposure. The Treynor ratio is calculated by subtracting the risk-free rate from the portfolio’s return and then dividing it by the portfolio’s beta. Treasury bills typically represent the risk-free rate.

Treynor ratio formula calculation

The Treynor ratio is similar to the Sharpe ratio but uses beta instead of the standard deviation. Both the Treynor and Sharpe ratios are used to evaluate performance and are often used to compare a portfolio’s performance relative to a benchmark.

Jensen's Alpha

Jensen’s alpha measures the excess returns earned by a portfolio compared to the projected returns of the capital asset pricing model (CAPM). Jensen’s alpha takes into account the risk-free rate of return for a specified time period and measures a portfolio’s performance relative to the broad market or index.

Jensen's Alpha formula

When evaluating a portfolio, Jensen’s alpha helps to determine if the returns generated were consistent with the risk taken to achieve the results. The “alpha” in Jensen’s alpha is the amount by which the portfolio outperformed the benchmark. A Jensen’s alpha of 0 means the portfolio earned no excess return.

Information Ratio

The information ratio measures a portfolio’s alpha divided by its tracking error.

To calculate the information ratio, subtract the benchmark’s return from the portfolio return, and divide by the difference in the standard deviation between the two. The difference between a portfolio’s volatility and the benchmark’s volatility is known as tracking error.

Information ratio formula

The information ratio is the portfolio’s alpha divided by its tracking error. A higher IR signifies that a portfolio is outperforming the benchmark index relative to the risk taken to achieve the returns.

Calmar Ratio

The Calmar ratio uses a portfolio’s maximum drawdown as a measure of its risk and compares it to the compounded annual rate of return. The Calmar ratio uses a three year lookback period and is updated monthly.

A high Calmar ratio equates to a low risk of large drawdowns while a low Calmar ratio indicates a higher risk of a large drawdown.

Calmar ratio formula

Sortino Ratio

The Sortino ratio is similar to the Sharpe ratio but focuses primarily on negative volatility in a portfolio. In calculating the standard deviation for the Sortino ratio, only the returns that lie below the mean are used. Therefore, the Sortino ratio gives investors a way to evaluate the return of investment based on its return for downside risk only.

Sortino ratio formula

For example, funds with high levels of performance tend to have higher standard deviation of returns. However, if the returns are +10%, +30%, +15%, and +50%, the high standard deviation of returns is misrepresentative because the volatility has all been to the upside.

Join 200k+ options traders
Thank you! Please check your email!
Oops! Something went wrong...
Be the first to get notified when we publish new updates.

FAQs

How is the win rate calculated?

To calculate the win rate, divide the total number of winning trades by total trades. For example, if an investor has placed 200 trades and has realized a profit on 120 of them, the win rate is 60% (120/200).

What is a good profit factor?

Profit factor is important when used in conjunction with win rate because it creates a more complete view of trading performance. Profit factor is calculated by dividing gross profit by gross loss for a trading period.

A profit factor of 1 means that all profits and losses added together break even, so any profit factor over 1 would indicate a profitable investing approach.

What is the formula for return on investment?

Return on investment measures the effectiveness of an investment relative to its initial cost of entry. ROI divides the return of an investment by the initial cost of the investment. For example, if an investment cost $5,000 to purchase and is now worth $6,000, the ROI for the investment is 20% ($6,000-$5,000 = $1,000 / $5,000).

What is a good ROI?

A good return on investment is subjective and varies depending on each individual investor’s profit target and account size. ROI varies from industry to industry, and different strategies will produce different returns. ROI is often analyzed over several periods to determine if performance is improving or declining. 

What is the difference between profit margin and ROI?

Profit margin is net income divided by sales and measures the percentage of sales that reach a company’s bottom line.

Return on investment measures the effectiveness of an investment relative to its initial cost of entry. ROI divides the return of an investment by the cost of the investment.

What does the CAGR tell you?

Compounded annual growth rate (CAGR) measures the rate an investment would grow if it increased at the same rate every year and the profits were reinvested at the end of each year.

How do you calculate CAGR in Excel?

The “RRI” function in Excel calculates the compounded return for an investment. Enter the number of periods, the starting value, and the ending value into Excel.

For example, if an investment has grown from $1,000 t0 $2,000 over 5 years, enter =RRI(5,1000,2000). The calculated value in Excel is 14.87%. 

What is a good Sharpe ratio?

The Sharpe ratio measures the return of an investment relative to its risk. The Sharpe ratio helps to determine if returns are the result of sound investing or a product of taking on too much risk and can be used to evaluate past performance. The higher the Sharpe ratio, the better the performance is relative to the risk required to generate the returns.

Increasing the diversification of a portfolio often results in a higher Sharpe ratio. 

How do you calculate the Sharpe ratio?

The Sharpe ratio is calculated by subtracting the risk-free rate of return from the portfolio’s return and dividing the value by the portfolio’s standard deviation of returns. The numerator is known as the portfolio's excess return. Excess return refers to any gains earned beyond the risk-free rate of return.

Treasury bills typically represent the risk-free rate.

What is the difference between the Sharpe ratio and the Treynor ratio?

The Treynor and Sharpe ratios are used to evaluate performance and are often used to compare a portfolio’s performance relative to a benchmark. The Sharpe ratio measures the return of an investment relative to its risk. The Sharpe ratio helps to determine if returns are the result of sound investing or a product of taking on too much risk and can be used to evaluate past performance.

The Treynor ratio is a risk to reward measurement that investors can use to calculate and adjust a portfolio’s exposure to the unavoidable, systematic risk involved with investing. The Treynor ratio uses a portfolio’s beta to determine its risk exposure.

The Treynor ratio is similar to the Sharpe ratio, but the Treynor ratio assesses systematic risk only. 

How do you calculate the Treynor ratio?

The Treynor ratio is calculated by subtracting the risk-free rate from the portfolio’s return and dividing it by the portfolio’s beta. The risk-free rate is typically represented by Treasury bills.

What does Jensen's alpha measure?

Jensen’s alpha measures the excess returns earned by a portfolio compared to the projected returns of the capital asset pricing model (CAPM). When evaluating a portfolio, Jensen’s alpha helps to determine if the returns generated were consistent with the risk taken to achieve the results.

The “alpha” in Jensen’s alpha is the amount by which the portfolio outperformed the benchmark.

How is the information ratio calculated?

To calculate the information ratio, subtract the benchmark’s return from the portfolio return, and divide by the difference in the standard deviation between the two. The difference between a portfolio’s volatility and the benchmark’s volatility is known as tracking error. The information ratio is the portfolio’s alpha divided by its tracking error.

How is the Calmar ratio calculated?

The Calmar ratio is calculated by dividing the average annual return by the maximum drawdown. The maxim drawdown is calculated by subtracting the portfolio’s lowest value from its highest value and dividing by the highest value.

For example, if the portfolio’s highest value was $120,000 and the lowest value was $100,000, then the maximum drawdown for the portfolio was 16.67%.

The Calmar ratio uses a portfolio’s maximum drawdown as a measure of its risk and compares it to the compounded annual rate of return. The Calmar ratio uses a three year lookback period and is updated monthly.

A high Calmar ratio equates to a low risk of large drawdowns while a low Calmar ratio indicates a higher risk of a large drawdown.

What is the difference between the Sharpe ratio and the Sortino ratio?

The Sharpe measures the return of an investment relative to its risk. The Sharpe ratio helps to determine if returns are the result of sound investing or a product of taking on too much risk, and can be used to evaluate past performance.

The Sortino ratio is similar to the Sharpe ratio, but focuses primarily on negative volatility in a portfolio. In calculating the standard deviation for the Sortino ratio, only the returns that lie below the mean are used. Therefore, the Sortino ratio gives investors a way to evaluate an investment’s return based on its downside risk only.

How do you calculate the Sortino ratio?

The Sortino ratio is calculated by subtracting the risk-free rate from the actual or expected return of a portfolio and dividing it by the standard deviation of the downside returns. The Sortino ratio gives investors a way to evaluate an investment’s return based on its downside risk only.

On this page
Win Rate
Profit Factor
Return on Investment (ROI)
Return on Margin
Compounded Annual Growth Rate (CAGR)
Sharpe Ratio
Treynor Ratio
Jensen's Alpha
Information Ratio
Calmar Ratio
Sortino Ratio
FAQs
Share this





No-code, fully automated trading for stocks and options.

HomeAboutLegalStatusContact
©2022 Option Alpha. All Rights Reserved. Patent Pending USSN 63/118,547