Position sizing and enabling leverage are too big relative to the presumed liquidity.
A question I don't see being asked is what factors are contributing to the presumption of liquidity?
(Same thing as underestimating risk, and WSB stumbled on a soft spot in assumptions).
Another way to think about it is perhaps how much is reasonable to short should not be a function of days to cover type metric but how much liquidity you could have gotten to cap the potential loss by buying OTM calls (or how many deep puts could you have bot instead)
In other words, the price of hard optionality instead of a risk mitigation strategy that looks like portfolio insurance in the opposite direction.
Underestimating gap risk. It always come back to this. It's always there even if you couldn't predict the tendie form it would take
Answering this question is how a fund manager can outsource the sizing question to the folks whose job is to price liquidity. Yes, they will extract a fee for consulting, but they are now on the hook for mispricing. Not the PM who wanted to get short.
Every single trade comes with a precommittment to close in the future. The entry has slippage.
But closing does to. You can buy an option and pay fixed slippage today in exchange for floating. Or you can use a risk rule and accept slippage on the exit to pay floating.
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With all the blatant coordination on WSB, this part of Chris's post hints at how pros communicate non-verbally. They are aware of how their actions are perceived. They assume the other pros are smart and can project the correct iterative strategy for the pro ecosystem to win...
Assuming the pros have settled into an equilibrium where they know which other pros are not going away.
Option market makers do the same thing. They understand how cutting a market affects future transactions. Dynamics can entrench without anyone saying a word.
MMs have tools for embarrassing brokers or other market makers. They might incinerate money to do that in hopes of changing the future dynamic and keeping the predator community honest so that nobody's share gets too out of balance.
Just wrapped a 3 hour drive back from Tahoe. Listened to the December @LeitnerJim interview on MacroHive that led to some investing strategy discussion with the wife. Here's a bunch of random thoughts from our chat and the pod...
My favorite idea from the pod: the discussion of replacing equity allocation with digital calls. He talks about buying say 5 year 100% OTM digital for 7 cents on a dollar. You should listen for his full reasoning...
It rhymes with Warren Buffet's thoughts on option pricing which is ultimately the difference between no-arb risk neutral derivs pricing and odds implied if you believe in an equity risk premium.
Floor trading and fintwit share an overlapping dynamic
"cooperative competition"
It'll be fun to lay out some basics of the floor trading ecosystem and you will spot analogies.
First an fyi.
The floor gave traders what was known as "time/place advantage". It was the first place an order became public if it was not an electronic order.
Let's classify the traders on the floor:
"Locals" and prop firms
"Locals" are independent traders.
They trade their own money and secure the right to trade on the floor by owning or leasing one of the limited seats which represented an ownership stake by the exchange's "members" (this was before demutualization)
For those of you looking to begin expressing creativity don't be scared.
1. Everything is a remix 2. You get better with practice 3. It's ok to start by copying (not plagiarizing)
The single most important thing to remember is that 1 pushup is harder than 50. So get unstuck...
I wrote this post earlier this year and it seems like the one to share for the resolutions and new beginnings crowd (I'm married to someone who gets excited by getting a new spiraled planner so i understand you folks).
I'll add some rambling musing to this including the whole optimizing for grades thing (which btw I'm not wholly convinced is bad strategy despite the popularity of influencers to say otherwise)...
The vets will need to bear with me, it's been 20 years since i traded index anything...but that actually shows why it's a good thing to explain. The lessons from it come to bear on thinking about all portfolios, even today.
First what is dispersion trading?
In its purest form, imagine selling an index straddle and buying the components' straddles in proportion to the index weights. In practice, liquidity makes this impossible. Instead one settles for a "dirty dispersion" position.
The trade is "short correlation". It wants the average corr between the stocks in the basket to be as low as possible.
Imagine a 2 stock index. You own the straddles on the stocks and you are short the index straddle. The 2 stocks rip in opposite directions. The index is unch