Asymmetric Risk Exposure

Asymmetric Risk Exposure is when the exposure to risk isn’t the same, or equal, to the exposure to gains. That is, the potential risk isn’t the same as the potential reward. Or, the realized risk or loss wasn’t the same as realized profit. The risk exposure of the position is more or less than that profit.

Examples of asymmetric risk:

A short sale has a limited gain potential, but an unlimited loss. If we short a stock at $50, it can only go down to $0, but it could rise to $500. Without a hedge or predefined exit strategy that limits the risk, the risk of $500 vs. a potential gain of $50 is an asymmetric risk.

Symmetric risk is when the risk and reward payoff are equal. An example of a symmetric risk could be an option collar. A collar constructed with options typically starts out with a gain and loss that are the same. The collar is a protection position constructed by buying an out of the money put option and selling an out of the money call option.

The out-of-the money put option is limits the loss in the underlying position and locks in a profit.

The price paid for the puts is offset by the premium collect by selling the out of the money call. The call puts a collar on the upside similar to the downside, giving the strategy a limited risk and limited reward: a symmetric risk. However, the position is structured to allow the underlying position to continue to gain some before the short call caps the gain. For a risk to be asymmetric, its upside potential must be more or less than its downside. Asymmetric risks have potential for danger or loss that isn’t the same as the potential for gain or opportunity.

To learn more about asymmetric risk exposure and asymmetric return profiles and asymmetric payoffs, read:

Asymmetric Payoff / Asymmetry Payoff

Asymmetric Investing

Asymmetric Returns

Asymmetric Return Distribution / Asymmetric Risk Return Profile / Asymmetric Risk Reward Profile

Asymmetric Trading System / Asymmetric Investment Strategy

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  1. Pingback: In remembrance of euphoria: Whatever happened to Stuart and Mr. P? « ASYMMETRY® Observations

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