Fat tails
Definition · Level 4 · Naked options
Keep reading with Tradecraft
Without an account, you can read three definitions every 30 days. Tradecraft explains all 738 terms and strategies, with the lessons that teach them, flashcards that come back before you forget, quizzes and a payoff lab.
Extreme moves occurring far more often than a normal distribution predicts (excess kurtosis), so so-called 5-sigma days come much more often than a normal model suggests.
Example
Oct 19, 1987: the S&P 500 fell about 20% in a day — roughly a 20-sigma move against its prior daily volatility, practically impossible under normality.
Where Tradecraft teaches it
Level 4 · Naked options, in the lesson “Short gamma, gaps and tail risk”: Why losses accelerate, why stops fail on gaps, the steamroller, and margin calls.
Related terms
- Forced liquidationThe broker closing your positions itself — typically at market prices and without waiting for your deposit — to bring the account back within…
- Gap riskDanger that a price jumps between trades — overnight, over a weekend or on news — skipping your stop and your chance to adjust.
- Negative balanceAccount equity below zero after losses exceed everything in the account; the customer owes the broker the deficit.
- Negative skewA P&L profile of many small gains and a few very large losses; typical of option selling.
- Picking up nickels in front of a steamrollerDesk image for strategies that collect small, steady gains while exposed to a rare, crushing loss — the classic critique of naked option selling.
- Short gammaPosition whose delta moves against the stock — shorter as it rises, longer as it falls — so large moves either way hurt, losses accelerate and…