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Worst-case loss

The honest maximum a position can cost you, assuming the stop fails, the market gaps, and liquidity disappears at the same time.

Planned risk assumes a functioning market. Worst-case loss assumes it is not. For a stock position the realistic worst case is the position value in a fraud or a halt-then-reopen; for a short it is theoretically unbounded; for a naked option seller it can exceed the account.

Use a stress multiple instead of imagination. A common desk rule is to price a 3x-stop-distance adverse gap on single names and check the result against the account: if 1% planned risk becomes a 4% actual loss, can you take three of those in a week? That is a stress-testing question with an arithmetic answer.

The point of the exercise is sizing, not fear. Positions whose worst case is survivable can be held through anything; positions whose worst case is not survivable must be smaller, defined-risk, or skipped entirely - no matter how good the setup looks.

Related: gap-risk, largest-loss, stress-testing, catastrophic-stop

Educational only, not advice. Spotted an error? Post in Site Feedback.