The Option Alpha Podcast 240: Thinking In Probabilities & Risk
Dec 22, 2025
Explore the unpredictable nature of markets, where extreme events challenge traditional models. Learn why focusing on probabilities and fat tails is crucial for trading success. Discover practical strategies for risk management through position sizing, aimed at mitigating potential losses during black swan events. Delve into the importance of expected value over mere win rates and how automation can enhance trading discipline. Kirk shares insights from his evolution as a trader, including the psychological impact of losses and the necessity of adapting to market realities.
AI Snips
Chapters
Transcript
Episode notes
Markets Have Fat Tails
- Markets have fat tails and extreme events occur far more often than normal models predict.
- Traders must build mental frameworks that assume black swans are inevitable and plan accordingly.
Position Size To Survive Black Swans
- Size positions small enough to survive black swan events and avoid account blow-ups.
- Treat position sizing as your primary risk control, not an afterthought.
Markets Remember And Cluster Moves
- Financial price changes are not independent or normally distributed like classic models assume.
- Markets show memory and clustered extremes, so normal-distribution-based probabilities understate risk.