Asymmetric risk is the idea of taking a small risk to produce a comparatively large return. This simple, yet mind-blowing concept will transform your trading career and overall quality of life. Yet, the concept of taking asymmetric risks is not discussed or even mentioned as an option in common trading strategies.
Give me a lever long enough and a fulcrum on which to place it, and I shall move the world. – Archimedes
Perhaps it would be impossible to find a lever large enough, and tough enough to not snap, or a fulcrum that wouldn’t be crushed, to move the world, but you could certainly find what you needed to move a very large boulder with little effort. And the same is so for trading strategies. Then why wouldn’t you use such power if it were at hand?
The reason is that we are conditioned, or even programmed to believe such power is not within our reach, or even available to us, that there is undo risk or the opportunities are so fleeting as to be futile to pursue. This is simply not the case, in fact, the opportunity to use an asymmetric method in your trading is frequently available to you, and it’s quite simple to employ. In my opinion, if you are presented with an opportunity to use asymmetric risk to reward, you should, without hesitation or fail, in fact, you should be seeking it out as the first option before all other options.
The ability to do great things with little effort, by using a bit of ingenuity escapes the vast majority of people, but that doesn’t have to be you. The really crazy part of this concept is that this doesn’t just apply to trading, asymmetric opportunities exist in all parts of life, yet we are blind to them. We only need to open our eyes and our minds.
Have you ever read 1926 classic The Richest Man in Babylon, by George S. Clason? It’s a book of 4,000-year-old parables filled with financial advice that is relevant even today. People these days look at anything (books, movies, ideas) more than 3 years old as useless, so yesterday. But this book, printed almost a century ago, with 4,000-year-old stories, has a great deal to teach us about the asymmetric risk to reward.
Consider the parable of the merchant trapped outside the city walls because it was nighttime. The gates of the city would not open until morning. The merchant had just come back from selling his wares and had quite a hefty amount of gold coins on him. As he was about to light his bonfire to camp outside the gate, he heard the bleating of a flock of sheep.
Another merchant, a sheep master, arrived with this flock. Introductions were made and the sheep master said he lived nearby and wanted to sell his sheep for a good price in the morning. Suddenly, a house servant of the sheep master arrived and with bated breath warned his master that his son was gravely injured in an accident. The sheep master was extremely worried and told the merchant he would sell all of his sheep at a great discount so he could hurry home to his son.
The sheep master said he had over 200 sheep with him. The merchant’s gold was just enough to cover the asking price for all the sheep. And he knew from experience that other merchants in the city would pay more than twice the price for those 200 sheep. But there was no way to confirm that there were 200 sheep because it was too dark to count them. The merchant was presented with an asymmetric risk. The reward was to make a quick profit by buying the sheep for cheap and then selling them in the city for a much higher price. The risk was that the old man might be lying to him about the number of sheep. What if there are only 100 or 50 sheep in the flock? The merchant ended up not buying the sheep.
So the old man decided to hurry home and left his servant there to sell the sheep in the morning. The next morning, when the gates opened other merchants came out and bid up the price of the sheep to four times the amount of gold the sheep master offered the merchant. The first merchant squandered his chance to profit greatly because he didn’t take the asymmetric risk.
Obviously, we are not talking about trading sheep here on a site dedicated to trading the last day of options expiration, but we are talking about recognizing the opportunity and a situation that affords you the ability to achieve asymmetric profits from small amounts of risk capital, often as much as 500-1500% from trades as small as $50. So, why wouldn’t you do this? Why would you do something else under the same conditions, that only offered a 10 to 20% return on $1000 of risk capital? This seems to be a rhetorical question.
The reason you don’t do the asymmetric trade is that you are completely oblivious to it, you have been conditioned to believe it doesn’t exist. therefore it’s not on the table as a possibility…it never enters your mind. And so, you suffer great anxiety and the peril of risking large amounts of your money for small scraps of profit. yet the opportunity is right there, every time.
Earlier in this post, I said asymmetric risks are everywhere in life, not just in trading. Often we are confronted with mind-blowing opportunities that could change our lives. But we don’t even recognize they are there, right before us, within our grasp, and all we have to do is ask. But we don’t. And why? Because we were afraid of rejection, the person would say no. Consider this…you avoid great opportunities because you are afraid someone says no to you. But what if they had said yes? Well, you will never know, will you?
Asymmetric risks do not favor those who are complacent with the status quo, for the unadventurous, or those who are simply to lazy to take small risks, or afraid to just open their eyes, or squeamish to ask simple questions. However, if you can get over these simple social quirks, the world of abundance awaits you.