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Notes -
Puts have their own issue of negative carry and needing to be right on timing.
If you have a diversified short book and can theoretically hold forever then you have no negative carry and Can assuming valuations stay reasonable your max loss isn’t that much. I mean worse case for a cigar butt stock was a 3X loss for Melvin on a very small part of book. Market manipulation (which is ILLEGAL) is why the position didn’t work. Melvin wasn’t a market timing firm where puts would make more sense.
And acting as a group to acquire over X amount of a firm is ILLEGAL which theirs no lack of evidence that the market manipulators were NOT encouraging acting as a group behavior . Elon Musks broke security law by acquiring more than X% of a stock. And if he split up the order with a buddy it would be ILLEGAL.
Melvins risks management was simple. Assume the SEC enforces security law.
This is all in Dodd Frank. You can’t even put a short term bid offer in the market anymore to bluff your intentions or you go to jail.
It's not unprecedented at all for illegal manipulation of affect stock prices. It happened during the 90s and early 2000s. Maybe a heuristic as simple as closing out a short position when it doubles in relative size would have saved them . But nope. They stayed in way too long and paid for it.
That adds negative carry and that heuristic which just get owned by the 2sigma and rentech types calculating their stops and running them
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