In our previous article, How to take advantage of an impending crash- Part 3: ultra-conservative approach, we mentioned one conservative strategy. Today, we will introduce a short-term trading strategy?asymmetric payoff. Please note that our previous article, How to take advantage of an impending crash- Part 2: understanding a subtlety, contains pre-requisite understanding for this article.
The basic idea behind the asymmetric payoff strategy is simple. First, you structure your bet in the market such that if you lose the bet, your loss is very tiny, but if you win, your gain is very massive. Next, you bet that the market will crash within a specific period of time. If you lose that bet, place another bet for the next period of time. You do this repeatedly until the day of the Black Swan event when your profit overwhelmingly overshadows your accumulated small losses.
Obviously, the disadvantage of this strategy is that it requires fortitude to absorb small losses indefinitely while waiting for a highly rewarding final vindication in the end.
The next question is, how do you implement such bets in practice? We will slowly reveal the answer in the next series of articles on how to implement asymmetric payoff bets.
Hence, today we conclude this series. One final note: each of these strategies has its time and purpose?even the risky one mentioned in How to take advantage of an impending crash- Part 1: the risky way can be used when the bull market ultimately turns over into a bear market after the crash. Therefore, it is not necessary to restrict yourself to only one strategy. With planning, you can include each one of them in your grand overall strategy.
