This article was originally published in The Option Strategist Newsletter Volume 9, No. 19 on October 11, 2000.
Many sophisticated traders use ‘expected returns’ to analyze the profit and loss expectations of their investment strategies. In this article, we’ll define what that entails and then point out some of the benefits and difficulties in using such statistics to predict how a strategy will perform.
This article was originally published in The Option Strategist Newsletter Volume 14, No. 10 on May 26, 2005.
Statistically-based trading is normally applied to hedged positions. It could be pairs trades for stock traders, or option spreads for option traders, or intramarket spreads for futures traders. But generally, the position is one that is based on a relationship between the entities involved – whether that relationship be a price-based relationship or a volatilitybased relationship. The position can be evaluated using assumptions about price relationships or about volatility, and those assumptions are based in historic fact, upon which mathematical calculations can be made (expected return, for example, and then the Kelly Criterion).
