Asymmetric payoff
What does it mean when a position's possible gain and possible loss are very different in size?
In plain words
An asymmetric payoff is one where the amount a position can gain differs greatly from the amount it can lose. The two sides are not mirror images, so the size of the move matters less than its direction.
Why it matters
With an asymmetric payoff, being right about direction matters more than being right about size, and being wrong can cost little if losses are capped. Traders size positions and choose structures partly to build this imbalance, though a lopsided payoff usually comes with lower odds on the larger side.
In a real week: ETH, week of 25 May 2020
In the week of 25 May 2020, ETH opened at 199.9 and closed at 231.57, a gain of 15.84%. From the open, the largest adverse move was to the week's low of 196.9 on 26 May 16:00 UTC, roughly -1.5%, while the high of 247.0 on 30 May 22:00 UTC was 23.56% above the open. The best day added 10.44% and the worst day -4.98%.
A common mistake
Assuming an asymmetric payoff means the trade is likely to work. A large possible gain usually reflects lower odds of achieving it, not free upside.