Reference is made to CB Vol 5, Exhibit 1 in Page 119-120.
Question 36 ask for attributes in Exhibit 1 that can provide the greatest opportunity to game its Sharpe Ratio.
It is straightforward to understand how first two attributes volatility measurement.
Also, I could imagine that writing call option could increase return through premium receipt while not appropriately incorporating it into risk.
HOWEVER, I’m not sure whether writing in-the-money call option would have equal magnitude compare to writing out-of-money call option in terms of so called gaming effect described in Curriculum Book. In other words, whether moneyness of option would affects opportunity to game Sharpe Ratio?
Could please anyone clarify this?
Thanks in advance.
ITM option - higher premium received. and more range on outcomes is possible.
OTM option - lower premium - lower range on outcomes.
so in terms of gaming - a ITM option would have a bigger impact, wouldn’t it?
I was thinking that, in case of ITM Option, it would be difficult to hide the potential loss(or realized loss, if transaction is considered to be Mark-to-mark) that is going to be realized whereas OTM option could be hidden. (my interpretation of GAME is to make artificially higher Sharpe Ratio, and this artificiality can only be achieved by deception.) Well, I can also imagine ITM option can create even higher return with higher premium without incorporating Mark-to-mark profit/loss.
Still, I am not sure whether in elsewhere story is written differently.
Thank you for your kind comment.