Disaster insurance for long-side index trader

M

Malinois

Was wondering if anyone employed a strategy to protect themselves in the event of a sudden disastrous event such as huge earthquake in Tokyo, LA , a major explosion or some other calamitous event.

I daytrade equity index futures from the long-side perhaps 80% of the time and would like to insure against the unforseen while in a position. I'm talking about something which takes the market down several percent or more instantly, a situation where a resting stop does not work because all bids disappear.

I have considered some type of put option strategy but admittingly don't have much experience with them. Can anybody comment on what they do or would do under these circumstances.
 
I use far out of the money futures options (usually in ES) to hedge against this type of thing overnight, but I don't know how effective my strategy would be in a disaster. There seems to be decent liquidity in ES futures options which is a definite concern -- what good would a huge paper profit in your hedge be if you can't lock it in to offset your losses in your primary position?
Note that this can be expensive too....

SSB
 
Quote from SideShowBob:

I use far out of the money futures options (usually in ES) to hedge against this type of thing overnight, but I don't know how effective my strategy would be in a disaster. There seems to be decent liquidity in ES futures options which is a definite concern -- what good would a huge paper profit in your hedge be if you can't lock it in to offset your losses in your primary position?
Note that this can be expensive too....

SSB
More...


If there is good liquidity, why would you have a problem locking in the gain on the hedge??
 
My concern was for other options, such as ER2 or NQ. ES seems OK, but if you end up in a strike price with open interest of only you, the person on the other end may not be interested in closing the position and you could be stuck in it.

SSB
 
Actually I do trade ER2 exclusively, so the liquidity would be an issue. I have never looked at the options before. Perhaps a ES put or even a OEX option work. ER2 is more volatile so it would not be perfect but I am really trying to address the anomylous event which I hope never occurs. Any offsetting gain would be welcome in that instance.

Because I have never investigated this before, I don't know what the cost is. Maybe it's too high and weighs on monthly profitability too much to be of value. I was hoping to hear from some other traders who employ this kind of risk management strategy or have looked into it to see if its worth it?

Thanks for the reply SideshowBob
 
In my opinion it hasn't been worth it -- but we haven't had any kind of event so it's like car insurance if you're a good driver....wasted until you total your car, then they give you the $500 they say your Ferrari was worth :mad:

Definitely check the ES options. I didn't know how they worked when I started, they cost the same per point as the underlying (so to buy an ES option at 2.5 you'd pay $50 x 2.5 = $125).

Also watch out before major events (such as a fed announcement) you may pay a lot more in premium.

SSB
 
That is interesting Question… I wonder what stocks are going extremely up and what stocks are going down in this kind of disaster. Any one knows?
 
For daytrading, you haven't a real worry since sudden news isn't digested as fast as you might think.

I daytrade ES. But I always use a braket. That is to say, an OCO with an exit and a Stop. Though you can always simply use a stop limit.

Trick is though, you will want to use a stop limit with your limit a full point or two or even more away from your stop.

For example:
LONG 50 ESM7 @ 1400.25

50 ESM7 Stop Limit 1385.00 1383.00

As news comes out, the first to learn and react start to sell. That causes a somewhat brief but orderly decline. As the rest digest the news, it causes an accelerated order imbalance. The point to remember is to be in Globex's cue with your order. It has a time and price priority algorithm.

And don't worry that you limit is so far away from your stop trigger. The ES market is so liquid that as soon as your stop triggers, your exit price will be at the prevailing market price... in normal conditions, making it an ideal comprimise for ordinary stop use and catastrophic stop use.
 
Quote from jerry11901:

That is interesting Question… I wonder what stocks are going extremely up and what stocks are going down in this kind of disaster. Any one knows?
More...

In the great depression, the thing that outperformed just about everything else, was gold mining stocks. In fact, they were a much better investment than gold.

Perhaps owning XAUs ??

My bigger concern would be a story that the Taliban or Al Qaeda had detonated dirty bombs in 10 western cities. I think you would see a market without a bottom, and a huge rush into gold
 
You must log in or register to reply here.
Back
Top