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).
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
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.
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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