Glossary — Tailhedge

Tail risk: The risk of a rare, severe outcome — one that sits in the thin "tail" of a probability distribution rather than its dense middle. In markets, it usually refers specifically to the left tail: sudden, large losses.
Fat tails: A description of return distributions where extreme outcomes happen more often than a standard normal (bell-curve) model would predict — the tails of the distribution are "fatter," or heavier, than the idealized model assumes.
Black swan: A term popularized by Nassim Nicholas Taleb for a rare, extreme, hard-to-predict event with outsized consequences — one that conventional models and expectations weren't built to account for.
Convexity: A non-linear payoff shape where large moves produce disproportionately larger results than small moves do. A convex hedge costs little in normal conditions and pays off increasingly fast as losses deepen.
Out-of-the-money (OTM) put option: A contract giving the right to sell an asset (often a market index) at a price below its current level. It is cheap and typically worthless in calm markets, but rises sharply in value if the underlying falls far enough to approach or pass that price.
Variance swap: A derivative contract whose payoff is based on the difference between an asset's realized volatility and the volatility level originally priced into the contract — a way to get direct exposure to volatility itself rather than to price direction.
VIX: The Cboe Volatility Index, a widely watched measure of the market's expected 30-day forward-looking volatility, derived from S&P 500 index option prices. It tends to rise sharply during equity sell-offs and is often referred to informally as a "fear gauge."
Beta: A measure of how an asset or strategy tends to move relative to the broad market. A negative beta means it tends to move in the opposite direction — rising when the market falls — which is the behavior a tail hedge is designed to exhibit during a drawdown.
Drawdown: The decline from a peak value to a subsequent low, usually expressed as a percentage — the standard way to measure how deep a market or portfolio decline actually was.
Peak-to-trough: Describes a decline measured from its highest point (the peak) to its lowest point before recovery begins (the trough) — the full extent of a drawdown, rather than a single day's move.

Key Terms