Convexity Made Simple

Convexity is a concept that all traders and investors must understand. While it can be complex, it isn’t difficult to grasp; at its core, convexity is simply an expression of non-linearity. What makes it so important is that it applies outside of finance, to life itself – as a philosophy of making small sacrifices for large potential returns.

Convexity In Simple Terms: Think Of A Moving Car

What is convexity? More importantly how does it apply to trading and life?

What is convexity?

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Convexity In Simple Terms: Think Of Asymmetric Butterflies

How are convexity and the butterfly effect related?

To complete the parallel, the convexity of a bond is akin to the acceleration of the car. Both are second derivatives of a first order rate of change. For cars, this first order rate of change is velocity, and for bonds, duration.

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Convexity In Simple Terms: How It Applies To Life

What is convexity? More importantly how does it apply to trading and life?

Convexity is much more than a mathematical/financial concept, it is also a way of living, a philosophy, if you will. Understanding what it is and how it applies is not just crucial for traders, but for everyday life as well, where small changes that are made or not made can lead to much larger consequences.

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Focus On Convexity: Trading On The Short Side

Being short convexity is akin to picking pennies in front of a steamroller

The financial version of apples and doctors (or flossing and dentists) is the darkly humorous “Picking pennies in front of a steamroller.”

But how does the concept of convexity apply in trading?

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Focus On Convexity: Trading On The Long Side

Being short convexity is akin to picking pennies in front of a steamroller

If a trader being short convexity runs the risk of getting flattened by the proverbial steamroller, what about traders who are long convexity?

How do they fit into the penny-picking-steamrolling aphorism?

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Get a different perspective on all things trading & investing every week!