The risk of extreme price movements that fall outside the range of normal expectations on a probability distribution. Tail risk events, while rare, can result in catastrophic losses and are often underestimated by standard risk models. These events are associated with the 'tails' of a bell curve distribution.
Example
“During the 2020 COVID crash, portfolios without tail risk hedging suffered 30%+ drawdowns in days, illustrating how rare but extreme events can devastate unprepared traders.”