The Risk Not Taken

We cannot eliminate risk. We can only choose the risks that we think are worth it.

I have worked in the “risk management” realm for quite a while in various realms. Options trading is, at its heart, all about risk management, or as some say, risk transfer. But if you are trading, no matter how you do it, you are taking on risks.

If you are a volatility seller, you are taking on the risk of the fat tails, those “once in a lifetime tidal waves” that come around in actuality every few years to wipe the slate clean. If you are a volatility buyer, you are taking on the risk of theta, the daily decay that eats away at all ordered things.

short vol 2

This was brought home to me over the last couple of days in another venue. I take quite good care of myself physically, eating reasonably clean (aside from the holidays) and working out regularly. I am actually in the best shape of my life, which is saying something for a lifelong athlete at the age of 46.

On Wednesday, I was kicking off the new year with a 100×100 workout. That is 100 kilos (about 220 pounds) for 100 reps for time, using the hex-bar deadlift (thanks to Stuart McMillan for this realm of hell). I have been workout out throughout the holidays, and this is a workout I have done in the past with no ill effect, other than trouble sitting down and standing up.

On Wednesday, however, I got my own version of a fat tail. I completed the workout in 4:55, which is quite good for someone my age. But right as I finished, something exploded in the back of my head. The pain was so much that I laid down then and there on the lifting platform and didn’t move for 5 minutes. This is apparently known as a “thunderclap headache” and can be the sign of bad things.

As it subsided to some degree, I shrugged it off as an exertion headache. But after it kept me up the entire night, I ended up, on the suggestion of my doctor, in the emergency room to make sure that I hadn’t literally blown a gasket. Six hours and a number of pinpricks later, I was cleared to go home and take it easy.

My point here is that I workout to stay healthy, to avoid risk. But, of course, exercise carries its own risks. Pushing myself as I did may not be the best choice (and I will likely not do that particular workout again). But I would rather be fit and healthy and feel good than sit on the couch and avoid the risks of excessive exercise. The risk is definitely worth the possible fat-tailed outcome that I drop dead in the gym.

After all, one day I will drop dead. I would rather it be in the gym, or on the ski slope, or bike trail, than sitting on my ass.

This holds true in all walks of life. Making a career change or taking on a new role has its risks. But so does staying in the crappy job you have.

Traders cannot hedge risk, just ask those risk parity guys. They can only choose their risks wisely.

This is a great thing to do going into the new year.

  • Acknowledge and look at the risks you are choosing.
  • Examine your worse case scenario.
  • Assume it is going to happen.
  • Can you live with that?
  • Choose those risks that you can live with… or even die with.


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