The most asymmetric opportunity right now
Asymmetric opportunities are those with incredibly favorable risk-to-reward ratio (RRR). In other words, you're not risking that much, but can gain a lot.
So, what is the most asymmetric opportunity right now? Well, it’s Chinese Yuan. Below is the March offshore RMB futures contract. It is equivalent to USDCNH currency pair. When it goes up, the Dollar gets stronger and Yuan weaker.
You can clearly see how the volatility has died out recently. A larger move is coming.
Here is a longer-term overview of the same data using a continuous contract.
The Chinese economy is in a precarious state. Its business model, based on cheap labor utilized by global supply chains, is breaking down. To make matters worse, China is heavily indebted, and these are mostly unproductive debts tied to the overheated real estate market.
That makes us believe the value of the Yuan will decline going forward, suggesting the price on the chart above will move higher.
So, asymmetric opportunities are great, right? Not so fast! The volatility compression is the result of high uncertainty and indecisiveness. Nobody knows in which direction the breakout will happen.
But you can admit that it does not matter so much due to the incredible RRR. The low volatility, in theory, allows for building a position with lower risk. If the price breaks in our favor, great. If not, we can quickly get out with a small loss.
That sounds great, but the key word in the previous paragraph is "in theory". In practice, the increase in volatility may be so sudden that the price makes a sharp move against your position. And if you rely on STOP orders to limit your risk, keep dreaming. There is a good reason why professionals don't use them.
These sudden volatility spikes are often the result of some macro data release. It probably won't be different with the Chinese Yuan. CPI data is about to be released in the US, so maybe the Yuan will start moving today.
So, are these asymmetric opportunities actually good or bad? Some people prefer markets where the trend is well-established. But I personally like them. So it all depends on your strategy and personal preferences.
There is no free lunch in the markets.
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