Market Measures - May 3, 2021 - The Efficiency of the Kelly Criterion

published 1 week ago by tastytrade, Inc.

In high IV environments, it is historically and mathematically sound to allocate more capital. The capital allocation difference in low IV vs high IV according to the Kelly Criterion is 84% - 56% = 28%, similar to our 50% - 25% = 25%.  The main reason lies in the lower chance in an outlier loss as a multiple of credit received.  A simple reduction in the probability of outlier loss from 5% in low IV to 3% in high IV, is enough to justify a much greater capital allocation level.

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