Like Sharpe Ratio, but only penalizes downside risk — ideal for options strategies.
A Sortino Ratio above 1.0 is considered acceptable, above 2.0 is good, and above 3.0 is excellent. Because it only penalizes downside volatility, Sortino values are typically higher than Sharpe values for the same strategy. Compare strategies against each other rather than using absolute thresholds.
Many options strategies (such as covered calls or iron condors) have positively skewed returns — small, consistent gains with occasional larger losses. The Sharpe Ratio penalizes these strategies for their upside volatility, understating their true risk-adjusted performance. The Sortino Ratio only penalizes the downside, giving a fairer picture.
Downside deviation measures only the volatility of returns that fall below a target threshold (typically the risk-free rate or zero). It ignores positive deviations entirely. This makes it a better proxy for the actual risk an investor fears — losing money — rather than all variance in returns.
Yes. A negative Sortino Ratio means the investment's return is below the risk-free rate, similar to a negative Sharpe Ratio. It signals the strategy is not generating adequate return even relative to the downside risk taken.
Use the Sortino Ratio when evaluating strategies with asymmetric return distributions — particularly options selling strategies, trend-following systems, or any approach where large gains are possible. Use Sharpe when comparing strategies with roughly symmetric return profiles, like long-only equity portfolios.