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Options have asymmetric payoff. Yet, options lose more than they gain for a given change in the underlying (referred to as asymmetric effect). These two arguments can be difficult to reconcile with. This week, we discuss why options have asymmetric payoff and yet suffer from asymmetric effect.
Greek story
A stock price cannot go below zero, but the price can climb up to any level. Importantly, a call option on a stock can only lose the premium you paid to buy it. This provides a floor to your losses. Because the upside on the underlying is unlimited, call options can offer greater gains. In other words, the downside is limited to the premium paid, but the upside is greater. That is the argument about the asymmetric payoff.
In the real world, unlimited upside does not exist. This is because options have an expiry date. How much can an underlying move from the time you initiate a position till the expiry date? The possibility of upside and downside movement in price is equally likely if you assume prices are random. But a trader takes a directional bet based on their reading of the chart patterns. The risk is that your directional bet could be wrong. The asymmetric payoff factor ensures that your maximum loss is the option premium. Suppose you expect the underlying to move up 300 points. If the option premium is 150 points, the maximum you will lose is 150 points even if the underlying declines by more than 150 points. Your gains can be greater.
The asymmetric effect tells a different story. For a given change in the underlying price, a call option can lose more value than it can gain. That is, the downside is greater than the upside for a given change in the underlying price. Suppose the underlying moves up 100 points, and the call option increases by 62 points. The asymmetric effect states that the call option will decrease by more than 62 points if the underlying declines by 100 points. Why? When a call option moves up, delta and gamma work in favour of the option. These two Greeks determine by how much the option moves up for a given increase in the underlying price. If volatility increases, the vega also works in the option’s favour. But when the underlying declines, the delta flips into a negative factor and joins the theta in hurting the option value. Though gamma always works in favour of the option, it is a small factor compared to the delta and theta. Hence, the asymmetric effect.
Optional Reading
An option is a right, and a right cannot have a negative value. Hence, the maximum you can lose on an option is the premium. But for a given change in the underlying price, with the delta and theta acting against a long position, losses can be larger than gains. This is one reason many lose when trading options.
(The author offers training programmes for individuals to manage their personal investments)
Published on May 24, 2025
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