The End of Uncertainty & How “Risk” Can Be Managed with Expectancy

The markets are evolving faster and faster as the introduction and use of computer-driven or data-driven trading systems start to hit exponential growth rates. So, the question becomes, is this the end of systematic risk and market uncertainty? To put it bluntly, no - in fact, never will we reach a point at which there isn't some sort of systematic risk that we have to price into our options trading. And these future expectancy models are where the opportunity will be. I believe that markets will eventually become flatter and more volatile which means that the traders and investors who can harness these sideways markets will ultimately outperform everyone else. Those who can manage risk, not eliminate it, through the use of data-driven software tools and technology will be the ones left standing and in today's show I want to dive deeper into these higher level concepts you need to recognize.

Key Points from Today's Show:

Two Types of Risk:

1. Systematic risk -- market risk, or undiversifiable risk.
2. Asystematic risk -- which you can diversify out of.

*There will never be a market situation where we have absolute or even close to absolute certainty about the future direction of anything.

• Markets get away with a lot before being corrected.
• When things get too crazy, eventually the markets normalize through black swan events.
• Black Swan events are the ultimate check and balance for markets.
• This creates the opportunity to price in uncertainty because the timing of these events are unknown.
• Uncertainty is not a bad thing; it creates a lot of opportunities to trade around it.
• Can do a lot more trading because of the perceived expectation of black swan events and big moves in the market.
• When people are expecting the worst, that's the best opportunity to make money trading options in any direction.

Computer Generated Trading

• More computer generated trading is a big concern of people.
• The more computers actually trade in the market, the more volatility we will see.
• The days of long trends in the market are coming to an end.

Managing Risk

• The way to manage risk is through expectancy.
• There is no way to avoid it and trade in the markets at the same time.
• Figure out how to trade around these events with probability and expectancy models.