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Options, Risk Math, and Psychology · Risk Math Deep Dive

Sortino vs Sharpe

Explain how Sortino differs from Sharpe and why it's a better fit for asymmetric strategies.

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Options, Risk Math, and Psychology

Risk Math Deep Dive

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Lesson 41 of 75Options, Risk Math, and PsychologyRisk Math Deep Dive

Today's tiny win: make one idea click.

Explain how Sortino differs from Sharpe and why it's a better fit for asymmetric strategies.

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Sortino: only count the bad swings

Sharpe has a flaw. It punishes ALL volatility equally — including upside volatility. A strategy that prints a +30% month gets penalized in Sharpe the same way a strategy with a -30% month does. That's silly. Nobody complains about up-volatility. Sortino fixes this. Sortino's formula looks like Sharpe but with one change: the denominator is the downside deviation — the standard deviation of ONLY losing periods. Upside doesn't count against you.

Wick compares two cards: Sharpe counts every swing including a +30% month, Sortino counts only the -3% and -2% months, showing how the two ratios differ.SharpeCounts everyswing, even the+30% monthSortinoCounts onlylosing monthslike -3% and -2%
Wick saysSortino only counts the bad swings, so a big winning month does not hurt it.

Worked example. Trend-following strategy with these monthly returns: +30%, +1%, +1%, -3%, +1%, +1%, -2%. The big +30% month happens once, the small losses happen twice. Sharpe sees the +30% as 'risk' and penalizes the ratio. Sortino looks ONLY at the -3% and -2% to build the denominator. Result: Sortino is higher than Sharpe, and it more honestly reflects what an investor cares about — losing months, not winning ones.

Wick points at a chalkboard saying when Sortino is much bigger than Sharpe it means rare big wins, so report both, teaching that the gap reveals the skew.Read the gapSortino much > Sharpe= rare big winsReport both
Wick saysReport both numbers. A big gap tells you the strategy has rare big wins.

When to prefer Sortino. Use it for strategies that go for home runs — trend-following, long-vol options structures, momentum. Use Sharpe (or both) for mean-reversion or market-neutral strategies where returns are symmetric. The general practitioner rule: if your strategy has a long right tail (occasional big wins), Sortino is honest about it. If your strategy has a long left tail (occasional big losses — like selling naked options), Sortino can FLATTER you. In that case, also watch max drawdown.

Wick holds a green card saying also check max drawdown and a coral card saying trust Sortino on naked option selling, warning that hidden big losses can hide.Do thisAlso check maxdrawdownNot thisTrust Sortino onnaked optionselling
Wick saysSortino can flatter strategies with rare big losses, so check drawdown too.

Recap: Sortino is Sharpe but downside-only. Better for positive-skew strategies. Worse for hidden left-tail strategies (where it flatters you). Report both. The gap reveals the skew.

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0 / 2 answered

1. Your strategy has Sharpe 1.0 and Sortino 2.5. What does the gap likely tell you?

2. For which strategy is Sortino most useful as an evaluation metric?

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