Methodology
Complete scoring formula and methodology
The model totals eight categories to 100 points, then applies visible penalties for concentration, liquidity, correlation, undefined loss, missing exits, and negative expected value.
CategoryMaxWhat earns pointsCommon deductions
Thesis and identifiable edge15Clear thesis, entry criteria, independent confirmationsVague thesis, excitement-only timing, weak factors
Expected value and payoff20Positive EV, acceptable reward/risk, realistic probabilityNegative EV, poor reward/risk, unsupported probability
Position sizing and capital at risk15Risk and capital fit the portfolioLarge portfolio risk, undefined max loss
Correlation and concentration15Low overlap and diversified riskHigh existing exposure or unknown overlap
Liquidity and execution10Tight spreads and realistic fillsWide spreads, poor liquidity, slippage risk
Volatility and regime fit10Structure matches volatility and market regimeTrade fights regime or ignores volatility
Catalyst and timing5Specific catalyst or testable triggerNo timing reason
Exit plan and invalidation10Clear target, loss plan, invalidation pointNo exit plan or no invalidation
Core calculations
- Reward/risk: maximum possible profit divided by maximum possible loss.
- Portfolio at risk: maximum loss divided by account or portfolio size.
- Capital committed: capital committed divided by portfolio size.
- Expected value: probability × max profit minus (1 - probability) × max loss.
- Breakeven probability: max loss divided by max loss plus max profit.
- Stress loss: max loss plus a liquidity and correlation stress buffer.
Disclosure
No universal hedge-fund scoring formula exists, and this site does not claim affiliation with or insight into any fund's proprietary process. The scoring model is an educational framework built from transparent risk-review principles.
Primary reading: Investor.gov risk tolerance overview · FINRA options overview and risk · SEC Investor Bulletin on options · OIC options pricing overview · OCC Options Disclosure Document