# Negative Convexity

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## Definition of 'Negative Convexity'

Negative convexity is a term used in finance to describe a situation in which the price of an option decreases as the underlying asset price increases. This is the opposite of positive convexity, in which the price of an option increases as the underlying asset price increases.

Negative convexity can occur when the option is deep in the money or when the underlying asset is subject to high volatility. In these cases, the option's price is more sensitive to changes in the underlying asset price, and a small change in the asset price can have a large impact on the option's price.

Negative convexity can be a significant risk for investors who hold options. If the underlying asset price increases, the option's price may decrease, which can result in a loss for the investor.

There are a number of ways to manage the risk of negative convexity. One way is to use a hedging strategy, such as buying a put option on the underlying asset. Another way is to sell the option before it expires.

Negative convexity is a complex concept, and investors should carefully consider the risks before investing in options.

Negative convexity can occur when the option is deep in the money or when the underlying asset is subject to high volatility. In these cases, the option's price is more sensitive to changes in the underlying asset price, and a small change in the asset price can have a large impact on the option's price.

Negative convexity can be a significant risk for investors who hold options. If the underlying asset price increases, the option's price may decrease, which can result in a loss for the investor.

There are a number of ways to manage the risk of negative convexity. One way is to use a hedging strategy, such as buying a put option on the underlying asset. Another way is to sell the option before it expires.

Negative convexity is a complex concept, and investors should carefully consider the risks before investing in options.

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Copyright © 2004-2023, MyPivots. All rights reserved.