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1/n Today, shorting GME was the biggest drawdown I’ve ever had. Here’s what went wrong and what I can do better next time. I’m not proud of a big loss, but am posting it to hold myself accountable.
There’s no shame in losing. Only in not learning.
There’s no shame in losing. Only in not learning.
2/n On Friday, I thought I was doing well shorting 90 ITM GME calls for 1 delta as it fell from 70. Took profit on 20, kept 70, and felt confident it would fall. Though I was short calls, this isn’t a story of vol-convexity blowing me up.
3/n Looking back, it’s obvious to see my size was too large. I was short 100% of my port in notional and it didn’t register because I was transferring 80% of the account out in portions. So positions were WAY too big.
4/n Moreover, I made the mistake of overestimating HF and underestimating retail. I believed no sophisticated fund would leave a naked short (that’s for retail right?) As per my previous post, I believed Melvin was synthetically long GME, so the squeeze was “priced in.”
5/n I also calculated my “risk” using limit up, since my small account wouldn’t push the book. I was short GME 50p in order to “buffer” a move to circuit breaker (+/-20%) and believed I was hedged
6/n what I didn’t account for is obvious is hindsight. LULD doesn’t trip in premarket and there’s ZERO book depth ATH. It’s easy for HF to run the book up 100% ($8/tick last night.)
There were sharks in the water and they smelled blood.
There were sharks in the water and they smelled blood.
7/n I also keep 20% of my account as cash as an “oh shit” buffer. Remember how I was transferring out money? Well on Sunday, exactly 20% of my account got transferred out and my BP ran to 0. My safety net was gone.
8/n I also run lots of dispersions. Because I was short GME, I purchased vols on RTY, long equity elsewhere, and 200x calls on AUPH and EXPR, both of which 7-bagged. Even these gains (>100k) couldn’t save me.
9/n The final kicker is that IBKR increased the margin on multiple positions at the same time; something I was not prepared at all for. Tickers like FUBO instantly sucked BP as margin reqs jumped to 75%.
10/n Thus at market open, I got instantly liquidated with terrible fills. GME 1/29 60c was filled at market for 40.00, and the next trade 5s later was at 22.8. While I was furious at the fill, the situation was ultimately my cross to bear.
11/n What’s the lesson here? Well unlimited risk is literally unlimited. Even if you think you’re hedged, if the position itself is not capped, it can wipe you out.
12/n it’s interesting because I primarily trade vols, so I am very aware of convex payouts wrt gamma/vanna. It slipped my mind that delta itself is convex.
I was so focused on neutralizing higher-order exposures that I forgot delta!
I was so focused on neutralizing higher-order exposures that I forgot delta!
13/n While it’s easy to blame “bad luck” (margin req increases, premarket sharks, cash transfers, bad fills,) at the end of the day it was fundamentally a bad trade.
14/n The things I studied before blew up on me.
I knew bubbles can’t be shorted. I knew right tails are difficult to manage. I knew that betting against volume is bad. Yet in the midst of it all, I still bet on mean reversion with a false sense of confidence.
I knew bubbles can’t be shorted. I knew right tails are difficult to manage. I knew that betting against volume is bad. Yet in the midst of it all, I still bet on mean reversion with a false sense of confidence.
15/n So here are actionable improvements:
Don’t assume circuit breakers/liquidity.
Double check position sizing as a % wrt port size daily.
Be aware of cash transfers in account.
Keep cash. Brokers can, and will, increase margin req without warning.
Size smaller.
Don’t assume circuit breakers/liquidity.
Double check position sizing as a % wrt port size daily.
Be aware of cash transfers in account.
Keep cash. Brokers can, and will, increase margin req without warning.
Size smaller.
16/n This was a humbling experience, and one that many great voltwit traders have cautioned repeatedly about. @darjohn25, @Ksidiii, and @VolQuant have all warned multiple times against unlimited risk and reflexivity (and have been amazing resources!)
17/n I can only be grateful that it happened to a portion of the full account and that it happened early on in my trading career. Taking big hits now can only pay dividends in the future 