For a position, how does Bernard Oppetit analyze risk and probability? "Although I know that I will exit the position after a certain loss, I still think that all the invested funds are fully exposed to risk."
"In addition, I will also consider the probability of a certain profit percentage of the position, and then evaluate the corresponding risk that I bear. I will consider the probability analysis of possible outcomes, such as: taking a certain action may have a 50% chance of developing in a certain way, not taking action may have a 50% chance of developing in a certain way, or 50% of small losses corresponding to 50% of big profits. You have to understand the probability distribution of the final result."
To analyze the feasibility of a trade, Bernard Oppetit regards all the invested funds as risk capital. He knows that the position will only suffer a certain degree of loss (for example: 15%), even if the maximum loss is set at 15%, he still thinks that the entire invested funds should bear all the risk.
Then, from this perspective, evaluate the probability distribution of various possible outcomes, and analyze the corresponding potential return. Only through the framework of probability analysis can you grasp the concept of return.
For example, if you establish an option position with an initial value of $10,000, the risk capital is regarded as $10,000. To evaluate the risk/reward ratio, Bernard Oppetit analyzes the probability distribution of the final result of the position.
In this way, you can understand the potential return provided by the relevant risk. (From a mathematical point of view, regard the occurrence probability as a weight summarize the various possible outcomes, and then compare the expected value of the return with the risk.)