Asymmetric Investing

Asymmetric Investing – Small Risk, Large Payoffs.

There are certain situations where asymmetry is in your favor. It might be a situation where a speculative stock or sector can experience a short-squeeze or it could be a situation with an asset that has traded “too far too fast” and allows for a risk/reward situation where the capital outlay is so small but the upside can be enormous. 

Someone risking for example $1,000 to make $10,000 is an example of an asymmetric bet. Someone risking $1,000 to make $1,000 is a symmetrical bet. Which one is more attractive? Most would say the 1 to 10 bet.

There are certain situations where select equities and equity options products allow for these larger asymmetric situations -where one can risk a small dollar amount to experience a large upside. 

And not to leave futures or commodities out of the picture, it can be done there as well. For example, at key market exhaustion points where the market “turn” might produce a better asymmetric situation v. say scalping a smaller move for 1:1. 

Many times you’ll see investors risking a majority of their capital in pursuit of a large percentage return. Or worse, they invest with 100% of their capital for a +20% return. 

That type of symmetry is common in Vegas casinos and in sports betting where many times there is little to no asymmetry. Most of the time these types of positions are speculative in nature so the risk on them is nominal in comparison to the overall portfolio. 

Let me show you an example of a speculative sector. In 2020-2021 elective car companies and energy/battery companies were inflecting. Now, I call them speculative because they were losing money (look at many of the charts of them now) and they were just ‘fad’ based sectors with hot money chasing them. There was one stock in particular, $BLNK, that went parabolic inside four months.

Again, not a situation that we would actively seek out but depending on the market environment if they present then they present. This would also not t be a position were capital risk would be substantial. There were two ways to express this: 

  • Buying shares small and holding as a non-expiring call 
  • Buying OTM calls

I elected for OTM calls but through the use of 2023 LEAPS. $4.00 of risk per LEAP with a fixed cost, duration and an asymmetric upside.

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