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Gain-to-pain ratio

The sum of all gains divided by the absolute sum of all losses over a period, usually computed on monthly returns.

Popularised by Jack Schwager, the monthly version divides the sum of positive monthly returns by the absolute value of the sum of negative ones. A record with monthly gains totalling 72% and losses totalling 30% scores 2.4.

Schwager's rough guidance: above 1.0 is decent, above 1.5 is good, above 2.0 over a long period is very strong. Because it uses every month rather than only the worst, it is far more stable than any drawdown-based ratio, and because it needs nothing but a return series, it is easy to compute honestly.

It is essentially profit-factor applied to time periods instead of trades, and comparing the two is instructive. A strategy with a high trade-level profit factor but a weak gain-to-pain ratio is winning often in small amounts and losing in clusters, which is a warning about return-skew that trade statistics alone will not show.

Related: profit-factor, omega-ratio, return-skew, sharpe-ratio

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

The volatility smile across strikesImplied volatility plotted against strike, dipping near the money and turning up at both ends, more steeply on the downside.Implied volatility32%28%24%20%8090110120Puts below the money cost moreFar calls cost more tooLowest IV near the moneyATM 100Strike price
The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.

Educational only, not advice. Spotted an error? Post in Site Feedback.