We explore how risk-adjusted short positions reveal hidden market risks, particularly in volatile tech stocks like NVDA, where traditional notional value underestimates true exposure and potential market impact.

The notional short position calculates the dollar value of a short position by multiplying the number of shares by the stock price comparing short positions of different sizes. However, this approach overlooks risks of these position in two keys.

Firstly, beta is used to adjust for market risk. Beta measures how much a stock typically moves compared to movements in the broader market, such as the S&P 500. For instance, a stock with a beta of two moves approximately 2% on average when the S&P 500 moves 1%, effectively "acting like" 2 S&P notional units. Conversely, a stock with a beta of 0.5 moves about 0.5% on average with a 1% move in the S&P 500.

Among the largest twenty-five stocks, health-care stocks like UNH and MRK have very low betas and correlation to the S&P, around 0.1, indicating they move only 0.1% on average when the S&P moves 1%. In contrast, tech stocks like NVDA have betas close to 2 (specifically 2.1), suggesting that a $100 million short position in NVDA behaves like $200 million of short exposure to the S&P.

Secondly, adjusting for volatility is another method to assess risk beyond market factors. Not all risk stems from market movements (beta risk). For example, while both AAPL and BAC have a beta of 1.2, AAPL's daily volatility is 1.5%, compared to BAC's 1.2%. AAPL has 25% more daily risk from firm-specific risk compared to BAC.

Investors concerned with the dollar risk of a position would consider AAPL to have 25% more risk than BAC. Therefore, a $100 million position in AAPL would face $1.5 million in daily risk (up and down), while in BAC it would be $1.2 million.

This daily short value ‘at risk’ provides insight into potential daily losses for an investor or the market. It is crucial for managing and accessing risk and squeeze risk.

NVDA is the most volatile among the largest twenty-five stocks, moving an average of 4% daily, followed by NVDA at 3.9%. In contrast, AAPL, also a tech stock, moves 1.5% daily, and MSFT moves 1.3% daily. This highlights that not all stocks within the same industry carry the same level of risk.

Comparatively, NVDA's volatility is 2.6 times AAPL and 3 times greater than MSFT.

When normalizing short positions, adjustments can be made using either beta or volatility. In both cases, NVDA's position risk is significantly larger than when considering notional value alone.

For example, comparing the three largest stocks: NVDA's aggregate notional position is 1.5 times that of AAPL and MSFT, but NVDA's beta-adjusted risk (S&P equivalent) is 2.4 times as large.

In terms of daily risk to the market, NVDA’s daily risk amounts to approximately $1.4 BB, while AAPL's is $0.36BB and MSFT's is $0.33BB. Thus, NVDA's daily risk is four times that of AAPL and 4.26 times that of MSFT.

NVDA and Other Position Adjusted by Beta and Daily Moves

Risk adjusted shorts can be added to analytics systems for individual and the market.

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