Sortino Ratio
Risk-adjusted returns that reward good volatility, not punish it
Definition
The Sortino Ratio is a variation of the Sharpe Ratio that uses only the downside deviation (negative volatility) instead of total standard deviation. This makes it a more relevant risk metric for asymmetric strategies like options selling, where upside volatility is actually desirable. A strategy with high positive returns and low downside deviation will have a superior Sortino Ratio compared to a strategy with similar Sharpe but more frequent downside moves.
Formula / Rules
Sortino Ratio = (Return − Risk-Free Rate) ÷ Downside Deviation
Example
An iron condor strategy has an 18% annual return, 5% downside deviation, and 5% risk-free rate. Sortino Ratio = (18% − 5%) ÷ 5% = 2.6. The high Sortino reflects that most of the strategy's volatility is upside (winning months), not downside. This is why options income strategies can look better on Sortino than Sharpe.
Related Terms
Frequently Asked Question
What is the Sortino Ratio?
The Sortino Ratio improves on Sharpe by measuring only downside volatility. For options sellers and income strategies, upside volatility is good — Sortino correctly ignores it and only penalizes harmful downside moves.
APA Citation
Last updated:
· Source: VixShield Trading Glossary — From SPX Mastery by Russell Clark
⚠️ Not financial advice. This definition is educational content from the SPX Mastery book series by Russell Clark (VixShield). Past performance is not indicative of future results. Trading options involves substantial risk of loss and is not appropriate for all investors. Always paper trade before risking real capital.