Odds, Fair Bet and Kelly Criterion (position sizing)

Moderate but necessary-math warning!

In my previous posts, you encountered the concepts of "fair play" or "fair bet." In this post, I’m going to introduce this concept in more detail, as it is one of the fundamental principles of option pricing and a key concept in risk management. I will also introduce a bet sizing mathematical model known as the Kelly criterion.

When the expected value over 100 bets is exactly zero, we refer to it as a fair bet. This means that the growth curve has no trend, or in other words, over 100 bets, the PnL theoretically becomes zero for both parties. “Neither the seller nor the buyer has an edge”