Read on Twitter
Synthetic Convexity
Convexity refers to non-linear returns of a vanilla option: buying DOTM wings you risk very little and lose often, but you win big when you're right (Taleb fat-tails or Brownfield Fund in the Big Short)
The most common technique to achieve non linear returns using linear instruments it's pyramiding: used in strong trending market, you compound the position using the first profits to add contracts, without ever exceeding the initial risk (but instead risking the unrealized PnL)
Another method could be to implement a money management strategy that compound your profits when you have a winning streak, keeping the same fixed initial risk when you lose. You increase your dollar risk per trade (the $ value of 1R) by previous winning after each winning trade.
If you hit a losing streak, your risk it's the same amount after each trade. You only increase the size after a win.
Example: $50 risk per trade, RR 1:3
If you lose 5 time in a row, you lose $250.
If you gain 5 time in a row, you gain:
$50 -> $200 -> $800 -> $3,200 -> $12,800
Example: $50 risk per trade, RR 1:3
If you lose 5 time in a row, you lose $250.
If you gain 5 time in a row, you gain:
$50 -> $200 -> $800 -> $3,200 -> $12,800
Example of a trading strategy with R:R 1:4 and a 35% winrate. Starting capital $1000, risk per trade(1R) $20.
This is a way you can build up a trading capital starting from a very small account. You can fine tune the parameters adapting them to your strategy.
This is a way you can build up a trading capital starting from a very small account. You can fine tune the parameters adapting them to your strategy.
Any strategy explained above require a lot of patience, exactly like buying DOTM options, you will lose little but often. Cherry pick the trades only going for the AAA+ setups. You can set some of the gains aside after each win instead of risking them all each time.
This is how you can achieve synthetic convexity using linear instruments like futures & stocks (or cryptos).
I repeat, this is mainly a way to building up your trading capital fast without having to be reckless on each trade.
Then you'll have to switch to common money management.
I repeat, this is mainly a way to building up your trading capital fast without having to be reckless on each trade.
Then you'll have to switch to common money management.
Arthur's take on convexity of options and crypto derivatives https://blog.bitmex.com/when-options-part-1/
