Understanding the Source of Edge in Trading Strategies

The key to successful trading is to have conviction in your strategy, as conviction drives consistent execution even during challenging times. It is crucial to understand the source of edge in trading strategies to determine why the strategy can generate profits. The primary driver of profits in trading strategies is believed to be the Volatility Risk Premium (VRP). Different strategies are essentially variations aimed at capturing this VRP in various market conditions. For example, a strategy like daily put selling benefits from both volatility risk premium and equity risk premium, making it robust but also vulnerable to market crashes. By identifying and leveraging multiple sources of edge, such as beta and alpha, trading strategies can achieve long-term solid performance despite occasional fluctuations.