Investors seek favourable risk-reward ratios in their investments. A manner in which this is achieved is through asymmetrical payoffs. Many tend to focus on the magnitude of the payoffs and a common rationalisation is that if I stand to earn $20 per share at the risk of only losing $2 per share, there is asymmetrical payoff and hence, a favourable risk-reward ratio. However, a critical factor is omitted and may result in warped expectations and misjudgements.

Short-selling

Here is one way of perceiving it. A commonly known disadvantage, or risk, in short selling stocks is ironically, asymmetrical payoff. Upon short-selling a stock, one profits from any fall in share price. The lowest that any share price can fall to is zero while the highest it can increase to is literally, infinite.  In this regard, an investor is susceptible to infinite downside while having a capped upside – asymmetrical payoff. By ......