Calculating sharpe ratio for shares is a straight forward task: (average returns - risk free ) / standard deviation. However i remain baffled as to how to tackle the task for options, can someone please advise regarding this?
consider the following example to obtain returns for American options:
step 1) - shares of xyz cost £21 each - 100 call option contracts (10 shares each) cost £2000 - expiration date 11-11-2013 - strike price £25 - price of shares goes up to £30 and trader decides to execute option * total cost: (25 * 1000) + 2000 = £27,000 * returns: 30,000 - 27,000 = £3,000 step 2) the confusion arises when you factor in that there are no previous returns. Conversely with shares such as aapl i can calculate weekly returns and easily calculate the average returns and standard deviation from these, for example if the following were aapl weekly returns: week 1 : 500 week 2 : 480 week 3 : 550 week 4 : 600 week 5 : 650
the average returns would be : 556 and standard deviation would be 70.21. How can i do the same with options? Would i need to go through a similar procedure of going back a date and doing step 1 again?
thanks in advance