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type: Concept title: "Framework Function 3 — Risk: The Never-Rules and the Posture Rules" description: The risk function — limits that are not tradable through: TOMIC's durable sizing and diversification rules, the regime-dependent delta posture, and standing tail rules learned from the 2018/2020/2024 failures. tags: [framework, risk, limits, delta-target, tail, heat] generated: { by: agent/pi-options-wiki-builder, at: 2026-09-09T19:03:40Z } status: draft sources: - id: tomic-risk resource: ../../option-traders-hedge-fund-bundle/topics/risk-management.md title: The Option Trader's Hedge Fund — Risk Management - id: delta-target resource: ../60-regimes/regime-dependent-delta-exposure.md title: Regime-dependent delta exposure - id: tail-cases resource: ../40-risk-management/tail-risk-principles.md title: Tail-risk principles

Summary

The risk function holds two kinds of rules: never-rules (absolute, regime-independent) and posture-rules (regime-dependent targets). Its defining property is that it runs outside the decision function — the decision engine consults it, but cannot negotiate with it. Limits breached means candidate declined, with no override path below the human approval gate.

Never-Rules (Absolute)

Inherited from TOMIC's durable core (position sizing, diversification), restated for the modern book:

  1. Heat cap: total open risk at a small, fixed fraction of equity; new candidates with insufficient headroom are declined. Frozen v0 parameters (from TOMIC's durable rules; changing any value is an amendment):
Parameter v0 value Source
Max risk per trade 2% of equity position sizing
Max monthly portfolio loss 6% of equity position sizing
Portfolio heat cap 20% of equity aggregate defined-risk width synthesis (operator-set, v0)
Max positions per underlying 3 operator-set, v0
Stress basis for sizing worst historical intraday VIX move (~+116%, 2018-02-05) 2018 case
ETP-flow halt trigger undefined — candidate variable, not implemented; cannot trigger a live halt until defined with source/threshold/fail-closed behavior see note below
2. Defined-risk at entry for all premium-selling structures; naked and undefined-risk tails are out of scope (a naked put's strike-to-zero loss is bounded-but-severe — still not defined-risk).
3. Diversification axes: underlying, structure family, and time-to-expiry; no day's proposals may concentrate all three.
4. Margin as liquidity risk: portfolio-margin accounts keep a cash buffer sized to the case-study lesson that variation calls arrive clustered, not individually.
5. Fail-closed data: no current regime snapshot → no new risk. Current is enforced, not assumed: an input older than max_input_age_business_days (2) business days counts as missing (tools/regime_snapshot.py, 2026-09-17). Managing existing positions on stale data is allowed; opening risk is not (see operating rhythm).

Posture-Rules (Regime-Dependent)

The headline modernization: the portfolio's delta posture is a target set by regime, not a static default (regime-dependent delta exposure):

  • The day's regime label and any transition state set the delta target band and the eligible/forbidden structure lists (Gate 1 of the decision function).
  • During transitions and pre-catalyst windows, the posture rule is flat / no new risk — the framework underwrites, it does not gamble on its own regime detector's latency (detection methods). The only exception: defined-risk event structures explicitly approved by the operator with the reasoning recorded in the decision log. This rule is authoritative over the decision mapping's event-window row.

Standing Tail Rules (Learned, Then Codified)

From the three failure cases — 2018, 2020, 2024 — now standing rules:

  1. Short-vol exposure is sized to survive the historical worst intraday VIX move, not the average.
  2. ETP-flow stress is a monitored regime variable; short-vol additions halt when it flashes.
  3. 0DTE shorts require intraday management capability or are forbidden.
  4. Correlation is stress-tested at 1.0 for all open positions — diversification that depends on correlations holding is not diversification.

Relationship to the Other Functions

The risk function is consulted at Gate 3 of every candidate and its parameters are versioned artifacts: changing a never-rule or a posture table is an amendment under the learning function, requiring recorded evidence, not a day-trading decision.

Links

References