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Convexity: Why Payoff Structure Is Only Half the Story
Understanding why structure, behaviour, and environment must align
Ben Cole4 min read·Just now--
For a long time, I thought I understood convexity.
At a basic level, it made sense.
Limit your losses. Allow your gains to develop. Accept being wrong often in exchange for occasional larger wins.
It felt like a simple improvement over the way most retail traders operate.
And in isolation, it is.
But over time, I began to realise that this definition — while directionally correct — was incomplete.
Convexity is not just about payoff structure.
It is about how that structure behaves in reality.
The Simplified View
Convexity is often described in straightforward terms.
Small, controlled downside. Open-ended upside.
Compared to the more common alternative — small gains and occasional larger losses — it represents a clear improvement in how risk is managed.
And at a conceptual level, that’s true.
