It's unlimited opportunity loss. If you sell at say $100 and it goes to $1000 while you're in cash, you "lost" $900 vs your original position. However if you hold at $100 and buy a put for $2 that hedges you, you can still participate in the upside while limiting your downside. Also, downside risk has been historically undervalued (this may be changing though) which is why tail risk funds exist.
everything has an unlimited opportunity loss though. if I put all my money in SPY, I'm forgoing the "opportunity" to buy a bunch of OTM gamestop calls at the perfect time and 10x my net worth.
The strategy forces you to time the market. You might get unlucky by holding cash during a market rally, then buy back for a dump.
An investor who sells when they think the market is going to go downhill, with the intention to buy back later is not acting as an investor but as a trader.
That's why hedging with options is less risky (and less profitable in the best case).
edit: My use of word 'unlimited' applies if you want to keep the same stake at the companies. In money terms you cannot lose more than the value of your holdings.
Yep, then I agree. I'm not advocating for trying to time the market, or holding cash instead of being on the market.
But selling your position simply does NOT mean you take on "unlimited loss potential". It's simply being outside of the market, which means you're missing out on gains. It's not like selling stock is suddenly the same as shorting the same stock. I think the terminology here is clear-cut and well established.
I get what you're saying and I think your terminology makes sense.
But the way to understand this is to reframe your view of "money" from being some special, neutral thing to just being another asset.
At any given moment, you could own $1000, or some gold, or some bitcoin, or whatever else. There is nothing special about the fact that it's $ you're holding rather than DOGE or SPY.
So imagine a 2-asset world, that has SPY and $ in it. You are holding $1000 right now, and the market goes from 1 SPY = $1 to 1 SPY = $1000. That is a loss. Denominated in SPY, you just lost 999 SPY.
