Long three private banks and a Bank Nifty call is a single trade with four tickets. How to measure and cap it.
Key takeaways
- Correlated positions add risk without adding diversification.
- Cap exposure by theme — sector, factor and direction — not just by trade count.
- Correlations rise in stress, exactly when you need them not to.
Diversification requires positions that behave differently. Four banking stocks in a rising rate environment behave almost identically, so holding four of them is not four trades. It is one trade at four times the size.
Set thematic caps. For example, no more than 1.5 risk units in any single sector, and no more than 3 units net long or short across the book. Simple caps prevent the accidental concentration that produces the worst days.
The dangerous property of correlation is that it increases under stress. Assets that looked independent for months move together during a global risk-off session — the exact session in which your loss limit matters.
A practical monthly exercise: list open positions and ask which single headline would hurt all of them at once. If you can name one, you are holding a concentrated bet whether or not you intended to.
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