When standing puts fail the drawdown test

Bound the loss before stock selection

If losses and risk are not bounded, the operator is described as eventually being forced out of the market. Risk control is therefore placed ahead of stock selection.

A drawdown-limit is a precommitted ceiling on how far a position or the account may fall before size is cut or the trade is closed. An exposure-cap is a ceiling on how much of the book may stay net long, enforced with cash, small size changes, shorts, or index futures.

A stop is the first drawdown-limit

An individual long is typically closed after a 10% to 15% decline from entry. The exit is a mental or resting stop, not a decision to hold because the original thesis still feels right.

An exposure-cap keeps the book from going all-in

Net invested exposure is moved in 1% to 2% steps. The book is managed so it is not left fully exposed to a 10% market swing.

When signals conflict, an all-in or all-out book is rejected. A partial-book near 70% invested is treated as the less risky uncertain default. When market risk is judged to be rising, cash-retreat is used even if the cash yield is low. Index futures and short stock positions are accepted as tools for cutting net exposure and bounding risk under the exposure-cap.

A standing protective-put is treated as too expensive

Buying puts as a standing hedge is criticized because the contracts are usually expensive and repeated premium outlay becomes costly. A cheap out-of-the-money protective-put is considered only when a very large decline is expected. A 10% drop can still leave that option nearly worthless.

Survival is a small equity drawdown

A survivable style is defined by small equity drawdowns of about 3% to 4%, not by occasional very large years that come with 40% to 50% drawdowns.