Note that the key assumption for why losses are unlikely is that they make many independent trades that are each likely to be profitable.
But in real markets, outside events can suddenly make many trades all fail at the same time. This is the same reason AAA tranches of CDOs got those high ratings -- you only lose money if many obligations fail at once, but that is extremely unlikely if you think they have low correlation with each another, which was historically the case.
But in a market crash, all correlations will tend towards 1.
But in real markets, outside events can suddenly make many trades all fail at the same time. This is the same reason AAA tranches of CDOs got those high ratings -- you only lose money if many obligations fail at once, but that is extremely unlikely if you think they have low correlation with each another, which was historically the case.
But in a market crash, all correlations will tend towards 1.