By eToro

OpenBook and the Promise of Social Trading III

(eToro Blog) In previous posts, we were surprised to learn that the typical revenue that is made from opening a Mirror option trade is much smaller than that of a non-social trade, which is in turn smaller than the revenue typically generated from a Copy option trade (which is, in fact, nothing more than a variation of the Mirror option concept).


In order to sort these things out, we have continued to analyze the data, switching absolute revenues for the percentage ROI that is made on average transactions. In so doing, we have single handedly resolved the Mirror-Copy paradox, as can be seen in the following graphs:



Notice how when we divide the revenues by the value of the initial investment we suddenly see that, although the absolute return on investment of non-social positions is much higher than that of Mirroring positions, its relative value (normalized by the initial sum of investment) is much smaller.


In fact, we now see a nice linear increase of ROI, starting with approximately 2% per transaction for non-social trades, going through approximately 3% for Copy transactions, and ending in more than 4% for Mirror option positions!


As this method of calculating the investor’s ROI gives a truer, more “correct” picture (as investors are more interested in the ROI they can make on any given value of initial investment) we can reiterate this past assertion: Social trading indeed works, and works better when you use more sophisticated social trading mechanisms!


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