The document discusses the Kelly criteria, which is an algorithm for determining optimal bet sizes in a series of bets that have fixed positive expected value. It consists of two components: winning probability and win/loss ratio. The Kelly percentage is calculated based on these values. The document notes that the Kelly criteria is not typically used for options trades because probabilities are based on implied volatility, which is derived from circular market prices. However, it may be applicable for defined risk trades with high probability of success. The slides linked in the document provide more details on calculating Kelly percentages and using it to determine optimal trade sizes.

1. Asset Allocation
Kelly Criteria

2. Kelly Criteria
http://www.investopedia.com/articles/trading/04/091504.asp
Two basic components:
Win probability
Win/Loss ratio
Kelly % = W - [(1-W) / R]
Where:
W = Winning probability
R = Win/Loss ratio
example:
Vertical with 70% probability or expiring OTM $1 wide collecting $.30
Kelly% = .7 - [(1-.7) / (.3/.7)]
Kelly% = ~.2% or $23 for every 10k in your account

3. 1. Skinny on Options Math: 3-27-14
"How large should we trade?"
Slides: https://s3.amazonaws.com/tastytradepublicmedia/show/
46/episode/10273/slide_decks/en/
SkinnyMath032714HowLargeShouldWeTrade.pdf
• We don't use the Kelly Criteria for options trades because
probability of profit is based on implied volatility, which is
derived from the bid and ask. The bid and ask are the payoff
odds. So it is very circular and Kelly would normally evaluate
to allocate zero funds because it is a fair trade.

4. 2. The Skinny on Options Math: 9-12-13 "Kelly Criterion"
Slides: https://s3.amazonaws.com/tastytradepublicmedia/show/
46/episode/6068/slide_decks/en/
SkinnyMath091213KellyCriterionII.pdf
• Can be used for defined risk trades with high probability of
success as the max win or loss of these trades most closely
relates to a trade with only two possible outcomes (success or
failure)

5. 3. Market Measures: 4-4-14 "Kelly's Heroes"
Slides: https://s3.amazonaws.com/tastytradepublicmedia/
show/9/episode/10425/slide_decks/en/
MM040414KellysHeroes.pdf
*Take a look at the slides for details
• Combining the trade entry and other metrics we use may
help to find optimal requirements
• Large draw down with 34 Iron Condors based on 11%
allocation

6. 4. Market Measures: 4-8-14 "Kelly's Cheat Sheet"
Slides: https://www.tastytrade.com/tt/shows/market-measures/
episodes/kellys-cheat-sheet-04-08-2014?locale=en-US#
• How much do you need to collect on a vertical spread to meet
the Kelly Criteria?
• The slides show the minimum you need to collect for the trade to
be “fair".
• Of course our ability to adjust, do more complex trades, and
extend time can affect success just as much.

7. 5. The Skinny on Options Math: 11-20-14 "Buying Power
Reduction"
Slides: https://s3.amazonaws.com/tastytradepublicmedia/
show/46/episode/15495/slide_decks/en/
SkinnyMath112014WhatisBuyingPowerReduction.pdf
Using the Kelly Criteria to help with Buying Power Reduction
*Review the slides to bring it all together