Blowing up/ getting wiped out on options

B

brab.uk

Is there any truth in this review of ig.com?

'These guys will be ok in non volatile times.....but when push comes to shove....and turbulent times....they will leave you hanging.

During the EURCHF black swan event, they manually aggregated client close positions, missed liquidity and cause client slippages of over 2000points. To put this in perspective, a position of £10 in EURCHF at 1.201 with stop loss 1.190 would have actually been closed at 0.9250. You would expect a loss of around £1,100........but no....they will give you all slippage and leave you with a loss of £27,600. Imagine your surprise...imagine how you would feel. Worst still, you were £100 per point. You are now looking at a life changing loss of £276,000. Mostly because of THEIR inefficient processes and THEIR liquidity providers.

YOU the client just got wiped out.'

If you was to have a paid guaranteed stop could this still occur? What can be done in order to stop this or something similar happening if anything? This is what holds me back from going live on my account. I feel I have done well on options so far on my paper account. My first month I had all profits and made over a months salary what I would usually earn in my normal job but not massively - I follow a consistency strategy.

After reading that above review it completely put me off and i went cold turkey, but now I am getting the bug again to watch and look into the markets. I have been learning for a good couple of years now but there are still things I do not understand such as the broker side of things as above. Any clarification please?
 
brab.uk said:
What can be done in order to stop this or something similar happening if anything? This is what holds me back from going live on my account.
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Good. Cuz when the phoo-phoo hits the oscillator, ......you're going to get your head blown off. Doesn't matter who did what to whom, or what time of day it is, or how you were 30 days from making a down-payment on a house..... you're going to get your head blown off.

Treasure Chest as Broken Market Pattern
John Wayne as Mr. Market
Richard Boone as You

 
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I'm not that big into forex, but that was the currency peg gone wrong that hit a lot of traders (and their firms massively). I think the lesson one learns from that is simple. If it seems too good to be true (i.e. massively overlevering on the can't miss trade...i.e. a perpetual peg that everyone else is playing and building up massive shadow risk, then do your best to avoid it. (or conversely, play a small bet on the outlier event eventually occurring.

Many people get trapped into this "income trading" philosophy which is prone to following that path of playing "can't miss" type trades with skewed risk to reward's that will cause one to develop a deer in the headlights reaction when it breaks hard the other way. Look thru enough charts and you will find almost all of them (and or visit enough message boards and listen to horror stories). Sometimes you CAN actually learn quite a bit from other's mistakes.
 
  • You are getting Options mixed up with Futures.
  • Equity Options are safe and you don't get wiped out with options.
  • Futures are more riskier than equity options and the EURCHF black swan event you described doesn't happen often - maybe once in 10 years.
  • Stick with Equity Options and you will be OK.
 
OptionsOptionsOptions said:
  • You are getting Options mixed up with Futures.
  • Equity Options are safe and you don't get wiped out with options.
  • Futures are more riskier than equity options and the EURCHF black swan event you described doesn't happen often - maybe once in 10 years.
  • Stick with Equity Options and you will be OK.
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I agree, assuming you are not a naked options seller.
 
I can think of five things to reduce risk of naked option selling.

1. Don't sell premium when volatility is at very low implied levels. Explore other strategies until "normal" volatility comes back.

2. Manage your positions using technical and statistical analysis. When the technicals start going significantly against your position, lighten up or close. Although this will create a number of annoying small losses and missed opportunities, the overall cost shouldn't be that high because you will avoid the big and inevitable outlier loss.

3. Do not over leverage. Think of the income not received as like a payment for "account blow up insurance".

4. As you near financial independence, consider diversfying your assets and creating a trust for possible protection from creditors should you later get hit with a once in a lifetime event.

5. Have marketable skills and at least a part time job as a financial backup. Many option income strategies do not require intensive trade management. Set an alert on the underlying to notify you of any potential trouble.

I believe the best results in option selling is not thinking of it as an almost automatic trade. The option buyers win sometime and it is best to at least get out of their way when they have the advantage.
 
So, I have a question, related to you guys related to the blowing out your account. Isnt there some % of ones account that one could write in index options lets say, and not really ever have to worry about blowing out you account?

Like just say "I will sell SP500 puts, moderately out of the money, in an amount such that I earn 2% of my account balance each month in premiums." Every month you just repeat.

So most months you would end up 2%. 24% a year without more. some months you will give some back naturally. so maybe end up like 15% annually? 12% annually? Thats a pretty healthy return if possible (I may be low or high, really no idea). But then the question come up is would the account be blown out in 2008 or something like it, or take such a loss that it would take you years to recover to where you first started.

Just curious if yall have any off the cuff thoughts, obviously i would have to study the numbers carefully. If viable I like this lock it and leave it approach, primarily because when getting not only in, but also out, you double commission, and might have to take a bid ask spread hit (to close, where you might have sold at the ask).

Thanks!
 
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People over-estimate the workings of stops.

In an extreme market, my guess is that lots of trades go through with market orders... which have priority over any limit orders. When your stop is set with a limit sell, it might get triggered but not executed when all the bids are swept with other market sell orders.

And when you have a stoploss with market sell in, the execution price can be well below the trigger price (like in the example: 1.201 with stop loss 1.190 would have actually been closed at 0.9250).

So... even with stops, you can be royally f%^cked... not necessarily by your broker... but by the market in general.

Don't rely too much on them.
 
Saltynuts said:
So, I have a question, related to you guys related to the blowing out your account. Isnt there some % of ones account that one could write in index options lets say, and not really ever have to worry about blowing out you account?

Like just say "I will sell SP500 puts, moderately out of the money, in an amount such that I earn 2% of my account balance each month in premiums." Every month you just repeat.
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A 2% monthly premium in puts means at current IV that would be short an ITM put (for 30 days till maturity). So... you wouldn't even make that on theta alone. Currently the ATM put is about 1,5%.

You could try to do it every week... selling a weekly OTM put for about 1-13 buck... but that would be about 1% OTM...

So however you put it, you're left with a decent size risk. You will probably lock your entire account in margin reqs. Sure, usually we go up... but when something like last February happens you on the hook for quite a while. Although... If you would have kept a 100d long through the past 3 months, you wouldn't be down that much really.
 
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