Option Money Management guide determines optimal risk percentage

Option Money
Note:
Management
this spreadsheet
guide determines % gain of entire bankroll based on criteria, not average % gain on the st
see instructions below
1 Set the parameters of the trade by setting up the "W" (ROI) for up to 16 possible "outcomes".
2 Then set the corresponding p or probability that each event occurs
3 Adjust the number marked in Green with black background
4 And while doing so, maximize the B' OR the M^N (both marked in green background)
5 The F gives you the maximum amount to risk per trade to achieve the "Kelly Criterion" And the return gives you the
6 Please Note: The F number (Kelly percentage) is intended for only 1 bet at a time. Since stock bets tend to have a
7 The future bankroll growth rate (M^N) or future bankroll after N such investments is different than expected value. I
8 In other words with equal chances of gain or loss, if a 20% loss takes you to 80 and 30% gain takes you to 104 you
9 The N number is the number of investments over a fixed period of time in case you want to compare an active trad
This spreadsheet is primarily intended to compare "apples to oranges". That is, to see return on risk for one option
However, if you want to know how tmuch to risk in a complete portfolio I suggest you read the following article.
link:
http://stocktradinginvestments.com/3-part-series-mathematically-precise-portfolio-management/
17%
200%
5%
-5%
-100%
40.00%
2.00%
3.00%
45.00%
$1,000
1,024.55
102.45%
1.00
1.02455
2.4546%
http://www.cisiova.com/betsizing.asp
F = % of your bankroll that you invest in A
W1 = ROI of Product 1 = 30%
W4 = ROI of No Products Launching = -15%
P1 = Probability of Product 1 Launching
P4 = Probability of No Product Launching
B = Initial Bankroll
B' = Future Bankroll after N such investments
M = The Geometric Mean of N such investments
N
number of investments over a fixed amount of time such as a year
M^N
Return factor over "N" Number of bets
% gain over "N" number of bets
Using the above infomation, we can formulate:
B' = B * (1 + W1*F)^(P1*N) * (1 + W2*F)^(P2*N) * (1 + W3*F)^(P3*N) * (1 + W4*F)^(P4*N)
M^N = B'/B = (1 + W1*F)^(P1*N) * (1 + W2*F)^(P2*N) * (1 + W3*F)^(P3*N) * (1 + W4*F)^(P4*N)
M = [(1 + W1*F)^(P1*N) * (1 + W2 * F)^(P2*N) * (1 + W3*F)^(P3*N) * (1 + W4*F)^(P4*N)]^(1/N)
M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
Therefore, to maximize the geometric return M, we need to find F such that the Product Sum of (1+Wi*F)^Pi for all
200%
5%
-5%
-100%
-50%
w1
w2
w3
w4
w5
w6
w7
w8
w9
w10
w11
uses above but only using the first 4
1,033.69
1.03
1.03
1.033687728
40.00%
2.00%
3.00%
45.00%
10.00%
w12
w13
w14
w15
w16
p1
p2
p3
p4
p5
p6
p7
p8
p9
p10
p11
p12
p13
p14
p15
p16
100%
90%
1
81%
2
73%
3
66%
4
59%
5
53%
6
48%
7
43%
8
57% INVESTED
6.3281% AVERAGE
1,024.55
1.02
1.0245460185
1.0245460185
not average % gain on the stock.
n" And the return gives you the expected GROWTH RATE of your portfolio per trade on average.
ince stock bets tend to have a correlation to each other, the sum of all bets typically should not exceed this amount
different than expected value. It considers your return over the very long run averaged to per trade which considers the portfolio volatility.
30% gain takes you to 104 you are only up 4% or about 2% per each of those trades.
want to compare an active trading strategy that has a lower return, but more trades per year, to one that has fewer trades but a higher return
ee return on risk for one option strategy to another, NOT to determine how much to risk in a complete portfolio.
u read the following article.
portfolio-management/
1,024.55
1.02
1.0245460185 Increase by a factor of per trade
1.0245460185
1024.546018
24.54601847
8.182006156
4*F)^(P4*N)
duct Sum of (1+Wi*F)^Pi for all i is maximized. Unfortunately, there is no simple formular that can compute the Kelly Criterion for multiple pos
M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
(1+Wi*F)^Pi

M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
(1+Wi*F)^Pi
nsiders the portfolio volatility.

fewer trades but a higher return per trade.
he Kelly Criterion for multiple possible outcomes. Fortunately,
Option Money Set

Management
the parameters
guideof the trade by setting up the "W" (ROI) for up to 16 possible "outcomes".
Then set the corresponding p or probability that each event occurs
Adjust the number marked in
Green with black background
And while doing so, maximize the B' OR the M^N (both marked in green background)
The F gives you the maximum amount to risk per trade to achieve the "Kelly Criterion" And the return gives you t
Please Note: The F number (Kelly percentage) is intended for only 1 bet at a time.
For Multiple bets adjust the X (# of assets in portfolio) and C% (Correlation). The M% will be your amoun
The future bankroll growth rate (M^N) or future bankroll after N such investments is different than expected value
It considers your return over the very long run averaged to per trade which considers the portfolio volatility.
In other words with equal chances of gain or loss, if a 20% loss takes you to 80 and 30% gain takes you to 104 y
Your long term growth considers volatility so that in the example 2% per trade would be the geometric mean of N
Unfortunately, predicting the actual annualized rate of return using multiple investments is difficult.
This allows you to compare "apples to oranges" such that you can determine an expected annualized growth rat
However, if you want to know more about how much to risk in a complete portfolio I suggest you read the followi
link:
90%
43%
8
57%
7.12%
1.25%
8.00
http://www.cisiova.com/betsizing.asp
1 - F%
(1-F%) ^ X Cash% remaining after all bets
x = number of assets in portfolio
% of Capital at risk
S0% = % per bet given correlation of 0.00
S1% = % per bet given correlation of 1.00
N*X
M%
0.03766122
M^N (adjusted for multiple
1.110bets) Works with N of 1 only
% gain over 1 bet 11.0485%
for MULTIPLE bets at set correlation
50%
10%
200%
0%
0%
-100%
50.00%
0.00%
0.00%
50.00%
$1,000
1,039.23
103.92%
1.00
1.04
3.923%
C = Correlation %
F = % of your bankroll that you invest in A
W4 = ROI of No Products Launching = -15%
P4 = Probability of No Product Launching
B = Initial Bankroll
B' = Future Bankroll after N such investments
M = The Geometric Mean of N such investments
N
number of investments over a fixed amount of time such as a year
M^N
% gain over N number of bets for a SINGLE bet
Using the above infomation, we can formulate:

M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
200%
0%
0%
-100%
50.00%
0.00%
0.00%
50.00%
100%
90%
81%
73%
66%
Therefore, to maximize the geometric return M, we need to find F such that the Product Sum of (1+Wi*F)^Pi for
Unfortunately, there is no simple formular that can compute the Kelly Criterion for multiple possible outcomes. F
w1
uses above but only using the first 4
1,039.23
w2
1.04
w3
1.04
w4
1.039230485
w5
w6
w7
w8
w9
w10
w11
w12
1,039.23
w13
1.04
w14
1.0392304845
w15
1.0392304845
w16
p1
p2
p3
1146.74481
p4
1.14674481
p5
1.017263233
p6
1.017263233
p7
p8
1.726%
p9
14%
p10
p11
p12
p13
p14
p15
p16
1
2
3
4
59%
53%
48%
43%
57%
6.3281%
5
6
7
8
And the return gives you the expected GROWTH RATE of your portfolio per trade on average.
M% will be your amount to risk on each bet.

ferent than expected value.
he portfolio volatility.
% gain takes you to 104 you are only up 4% or about 2% per each of those trades.
e the geometric mean of N investments where N=1
ted annualized growth rate for any given strategy whether it takes few trades per year or many
ggest you read the following article.
portfolio-management/
1,039.23
1.04
1.0392304845 Increase by a factor of per trade
1.0392304845
3.92%
1039.230485
39.23048454
13.07682818
t Sum of (1+Wi*F)^Pi for all i is maximized.

tiple possible outcomes. Fortunately, with the aid of computer, I constructed an optimization model that will find the Kelly Criterion for you.
M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
(1+Wi*F)^Pi

M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
(1+Wi*F)^Pi

M = (1 + W1*F)^(P1) * (1 + W2*F)^(P2) * (1 + W3*F)^(P3) * (1 + W4*F)^(P4)
(1+Wi*F)^Pi
ind the Kelly Criterion for you.
Correlation Matrix http://etfscreen.com/corr.php

This spreadsheet is work I did to provide
For more information please check out the 3 part series linked to below
Correlation with diversified equities market only is around .70 correlation.
Below is the correlation matrix for your requested symbols.

DBA
FXE
FXY
GLD
USO
UUP
XLB
XLE
XLF
XLI
XLK
DBA
1
0.23
-0.15
0.25
0.17
-0.22
0.19
0.2
0.09
0.16
0.18
FXE
0.23
1
-0.26
0.15
0.34
-0.93
0.39
0.36
0.39
0.33
0.33
FXY
-0.15
-0.26
1
-0.14
-0.22
-0.06
-0.38
-0.3
-0.37
-0.37
-0.19
GLD
0.25
0.15
-0.14
1
0.45
-0.17
0.45
0.44
0.22
0.3
0.24
USO
0.17
0.34
-0.22
0.45
1
-0.3
0.55
0.62
0.47
0.48
0.47
UUP
-0.22
-0.93
-0.06
-0.17
-0.3
1
-0.33
-0.32
-0.32
-0.25
-0.32
XLB
0.19
0.39
-0.38
0.45
0.55
-0.33
1
0.82
0.79
0.86
0.72
XLE
0.2
0.36
-0.3
0.44
0.62
-0.32
0.82
1
0.81
0.85
0.72
XLF
0.09
0.39
-0.37
0.22
0.47
-0.32
0.79
0.81
1
0.85
0.76
XLI
0.16
0.33
-0.37
0.3
0.48
-0.25
0.86
0.85
0.85
1
0.75
XLK
0.18
0.33
-0.19
0.24
0.47
-0.32
0.72
0.72
0.76
0.75
1
XLP
0.17
0.29
-0.31
0.16
0.23
-0.23
0.59
0.63
0.72
0.68
0.65
XLU
0.12
0.23
-0.23
0.13
0.2
-0.18
0.49
0.49
0.59
0.57
0.44
XLV
0.11
0.29
-0.3
0.15
0.31
-0.23
0.64
0.63
0.73
0.72
0.67
XLY
0.21
0.29
-0.38
0.21
0.36
-0.22
0.77
0.76
0.83
0.83
0.74
These 126 day (6 month) correlations can be considered short term, focusing on recent price movements.
Correlations are only calculated for actively traded funds. As of: 2013-05-10.
DBA
DBA
GLD
0.25
GLD
USO
0.25
0.17
0.45
XLB
XLE
XLF
XLI
XLK
0.19
0.2
0.09
0.16
0.18
0.45
0.44
0.22
0.3
0.24
USO
0.17
0.45
0.55
0.62
0.47
0.48
0.47
0.19
0.45
0.55
1
0.82
0.79
0.86
0.72
XLB
0.2
0.44
0.62
0.82
1
0.81
0.85
0.72
XLE
0.09
0.22
0.47
0.79
0.81
1
0.85
0.76
XLF
0.16
0.3
0.48
0.86
0.85
0.85
1
0.75
XLI
0.18
0.24
0.47
0.72
0.72
0.76
0.75
1
XLK
0.17
0.16
0.23
0.59
0.63
0.72
0.68
0.65
XLP
XLU
0.12
0.13
0.2
0.49
0.49
0.59
0.57
0.44
0.11
0.15
0.31
0.64
0.63
0.73
0.72
0.67
XLV
0.21
0.21
0.36
0.77
0.76
0.83
0.83
0.74
XLY

BAL
BAL
CORN
DBB
EWM
FXB
FXY
GLD
IYLD
JO
LAG
PSK
QAI
TLT
TUR
UGA
UNG
URTH
UUP
VMBS
VNM
CORN
DBB
EWM
FXB
FXY
GLD
IYLD
JO
LAG
PSK
1
0.12
0.04
0.13
0.04
-0.1
0.1
-0.04
0.29
0.16
-0.04
-0.12
-0.2
0.1
0.07
0.21
0.34
0.14
0.32
-0.13
0.07
0.05
0.11
0.08
0.35
-0.02
0.3
0.06
0.06
0.16
0.18
0.05
-0.17
0.11
0.11
-0.16
0.07
-0.15
-0.18
0.02
0.3
-0.03
0.28
-0.05
-0.06
0.05
-0.03
0.08
0.06
0.09
0.04
0.21
0.02
-0.06
0.01
0.12
0.12
0.18
0.07
-0.12
0.02
0.16
0.11
0.07
0.07
-0.19
-0.01
-0.27
-0.26
0.08
0.41
-0.05
0.26
-0.09
0.75
-0.02
0.2
-0.02
0.11
0.27
0.05
-0.09
0.13
0.29
0.08
-0.07
0.03
0.11
0.05
0.4
0.07
0.1
-0.21
0.3
0.16
0.08
-0.22
0.01
0.17
-0.18
0.1
-0.09
0.04
0.12
0.01
0.03
0.14
0.13
0.17
0.33
0.13
0.15
-0.21
0.26
0.18
0.14
-0.16
0.08
-0.06
-0.06
-0.33
-0.18
-0.61
-0.07
-0.2
-0.35
-0.09
0.12
-0.07
0.05
-0.04
-0.25
-0.13
-0.01
0.33
-0.01
0.09
-0.13
0.33
0.1
0.08
0.03
0.12
0.28
0.08
-0.16
0.19
0.08
-0.01
-0.21
-0.01
LAG
-0.12
0.04
-0.18
-0.18
0.03
0.27
PSK
-0.03
-0.03
0
0.11
0.04
0.06

BAL
BAL
CORN
DBB
EWM
FXB
FXY
CORN
0.11
DBB
EWM
0.05
0.05
0.14
-0.12
1
0.09
FXB
0.01
-0.06
0.28
0.17
0.11
0.05
0.14
0.05
-0.12
0.09
0.01
-0.06
0.28
0.17
-0.02
-0.03
-0.13
-0.2
0.14
FXY
-0.02
-0.03
-0.13
-0.2
0.14
1
GLD
0.06
0.19
0.33
0.14
0.36
-0.07
IYLD
0.11
-0.03
0.06
0.1
0.34
-0.04
JO
0.09
0.03
0.12
0.19
0.09
-0.16
GLD
IYLD
JO
LAG
PSK
QAI
SPY
TLT
TUR
UGA
UNG
URTH
UUP
VMBS
VNM
0.24
0.06
0.19
0.33
0.14
0.36
-0.07
0.11
-0.03
0.06
0.1
0.34
-0.04
0.24
0.12
0.13
-0.07
0.32
-0.05
-0.01
0.18
0.03
-0.05
0.09
0.03
0.12
0.19
0.09
-0.16
0.12
0.13
-0.12
0.04
-0.18
-0.18
0.03
0.27
-0.07
0.32
-0.05
-0.03
-0.03
0.11
0.04
0.06
-0.01
0.18
0.03
-0.05
0.04
0.1
0.11
0.2
0.11
-0.1
0.06
0.17
0.11
0.06
0.13
0.29
0.03
0.31
0.35
0.16
-0.39
0.24
0.38
0.11
-0.39
0.07
-0.19
-0.03
-0.29
-0.24
0.1
0.41
-0.04
0.3
-0.07
0.75
0.01
0.18
-0.01
0.09
0.26
0.02
-0.12
0.09
0.31
0.09
-0.06
0.07
0.15
0.03
0.39
0.06
0.12
-0.19
0.3
0.13
0.07
-0.24
-0.06
-0.03
0.17
-0.16
0.02
0.09
-0.07
0.05
0.12
0.03
0.04
0.06
0.12
0.1
0.27
0.16
0.13
-0.23
0.19
0.23
0.15
-0.11
0.1
-0.03
-0.04
-0.3
-0.17
-0.63
-0.12
-0.24
-0.32
-0.09
0.12
-0.08
0.08
-0.1
-0.3
-0.12
-0.03
0.29
-0.08
0.13
-0.14
0.37
0.13
0.09
0.02
0.13
0.27
0.07
-0.16
0.18
0.07
-0.03
-0.21
0.01
XLP
XLU
XLV
XLY
0.17
0.12
0.11
0.21
0.29
0.23
0.29
0.29
-0.31
-0.23
-0.3
-0.38
0.16
0.13
0.15
0.21
0.23
0.2
0.31
0.36
-0.23
-0.18
-0.23
-0.22
0.59
0.49
0.64
0.77
0.63
0.49
0.63
0.76
0.72
0.59
0.73
0.83
0.68
0.57
0.72
0.83
0.65
0.44
0.67
0.74
1
0.62
0.81
0.78
0.62
1
0.54
0.57
0.81
0.54
1
0.78
0.78
0.57
0.78
1
AVG INCLUDING
sum
ITSELF
1.71 0.1221
2.71 0.1807
0.2287
2.43 0.1736
-0.1773
-3.66 -0.2614
0.256
2.84 0.2029
0.342
4.13
0.295
-0.2053
-4.08 -0.2914
0.5033
6.55 0.4679
0.514
6.71 0.4793
0.504
6.56 0.4686
0.5173
6.76 0.4829
0.4773
6.16
0.44
0.4527
5.79 0.4136
0.372
4.58 0.3271
0.4567
5.85 0.4179
0.502
6.53 0.4664
4.924
4.2043
0.3283
0.2803
XLP
XLU
XLV
XLY
0.17
0.12
0.11
0.21
AVG INCLUDING
sum
ITSELF
1.85 0.1682
2.85 0.2375
#DIV/0!
0
0
#DIV/0!
0
0
0.3333
3 0.2727
vements.
0.16
0.13
0.15
0.21
0.23
0.2
0.31
0.36
0.59
0.63
0.72
0.68
0.65
1
0.62
0.81
0.78
0.49
0.49
0.59
0.57
0.44
0.62
1
0.54
0.57
0.64
0.63
0.73
0.72
0.67
0.81
0.54
1
0.78
0.77
0.76
0.83
0.83
0.74
0.78
0.57
0.78
1
0.4425
#DIV/0!
0.6558
0.6642
0.655
0.6708
0.6117
0.5867
0.48
0.5908
0.6533
#DIV/0!
#DIV/0!
vements.
QAI
TLT
TUR
UGA
UNG
URTH
4.31
0
6.87
6.97
6.86
7.05
6.34
6.04
4.76
6.09
6.84
UUP
0.3918
0
0.6245
0.6336
0.6236
0.6409
0.5764
0.5491
0.4327
0.5536
0.6218
6.0891
0.5074
VMBS
VNM
1
-0.07
0.07
-0.23
0.06
-0.27
0.15
-0.07
0.13
-0.09
-0.08
0.21
-0.28
0.15
0.26
-0.1
-0.11
0.06
-0.17
-0.16
-0.12
-0.15
-0.07
0.43
-0.19
-0.11
-0.01
0.16
0.1
-0.25
0.12
0.24
-0.07
0.19
-0.17
-0.28
SPY
0.29
0.03
0.31
0.35
0.16
-0.39
TLT
-0.19
-0.03
-0.29
-0.24
0.1
0.41
QAI
0.04
0.1
0.11
0.2
0.11
-0.1
TUR
0.18
-0.01
0.09
0.26
0.02
-0.12
UGA
0.15
0.03
0.39
0.06
0.12
-0.19
UNG
URTH
-0.03
0.12
0.17
0.1
-0.16
0.27
0.02
0.16
0.09
0.13
-0.07
-0.23
UUP
-0.03
-0.04
-0.3
-0.17
-0.63
-0.12
VMBS
0.08
-0.1
-0.3
-0.12
-0.03
0.29
VNM
0.09
0.02
0.13
0.27
0.07
-0.16
0.06
0.17
0.11
0.06
0.13
1
0.24
0.38
0.11
-0.39
0.07
0.23
-0.04
0.3
-0.07
0.75
0.01
0.06
-0.62
0.23
-0.06
-0.62
0.04
0.41
-0.22
0.09
0.31
0.09
-0.06
0.07
0.04
0.41
-0.22
1
0.3
0.13
0.07
-0.24
-0.06
0.07
0.33
-0.28
0.15
0.05
0.12
0.03
0.04
0.06
-0.06
-0.04
0.15
-0.07
-0.1
0.19
0.23
0.15
-0.11
0.1
0.18
0.36
-0.2
0.18
0.21
-0.05
-0.24
-0.32
-0.09
0.12
-0.08
-0.12
-0.28
0.02
-0.14
-0.16
-0.14
-0.12
-0.08
0.13
-0.14
0.37
0.13
-0.09
-0.33
0.45
0.04
-0.23
-0.09
0.04
0.19
0.07
0.33
-0.28
0.15
-0.06
-0.04
0.15
-0.07
-0.1
0.18
0.36
-0.2
0.18
0.21
-0.05
-0.12
-0.28
0.02
-0.14
-0.16
-0.14
-0.12
-0.09
-0.33
0.45
0.04
-0.23
-0.09
0.04
0.19
0.12
0.35
-0.25
0.1
0.23
-0.08
0.16
-0.16
-0.28
0.18
0.07
-0.03
-0.21
0.01
0.12
0.35
-0.25
0.1
0.23
-0.08
0.16
-0.16
-0.28
1
2.01
1.51
2.01
2.14
2.54
0.14
1.01
0.51
1.01
1.14
1.54
-0.86
0.0505
0.0255
0.0505
0.057
0.077
-0.043
3.04
3.93
1.82
1.34
1.74
2.42
2.57
0.7
2.41
1.98
0.84
2.87
-1.81
0.93
1.63
2.04
2.93
0.82
0.34
0.74
1.42
1.57
-0.3
1.41
0.98
-0.16
1.87
-2.81
-0.07
0.63
0.102
0.1465
0.041
0.017
0.037
0.071
0.0785
-0.015
0.0705
0.049
-0.008
0.0935
-0.1405
-0.0035
0.0315
0.788
0.037524

Option Money Management guide determines optimal risk percentage

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Option Money

uses above but only using the first 4

not average % gain on the stock.

B' = B * (1 + W1F)^(P1N) * (1 + W2F)^(P2N) * (1 + W3F)^(P3N) * (1 + W4F)^(P4N)

nsiders the portfolio volatility.

he Kelly Criterion for multiple possible outcomes. Fortunately,

Option Money Set

M^N = B'/B = (1 + W1F)^(P1N) * (1 + W2F)^(P2N) * (1 + W3F)^(P3N) * (1 + W4F)^(P4N)

M% will be your amount to risk on each bet.

t Sum of (1+Wi*F)^Pi for all i is maximized.

B' = B * (1 + W1F)^(P1N) * (1 + W2F)^(P2N) * (1 + W3F)^(P3N) * (1 + W4F)^(P4N)

B' = B * (1 + W1F)^(P1N) * (1 + W2F)^(P2N) * (1 + W3F)^(P3N) * (1 + W4F)^(P4N)

ind the Kelly Criterion for you.

Correlation Matrix http://etfscreen.com/corr.php

Correlation with diversified equities market only is around .70 correlation.

Below is the correlation matrix for your requested symbols.

Below is the correlation matrix for your requested symbols.

Below is the correlation matrix for your requested symbols.

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