EUR/USD - too risky to trade?

[justrading]

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Consider this: you have a position in something forex or whatever. Because you are concerned by the possibility of a black swan type move you buy OTM options. You experience a spike and you are stopped out with huge slippage. You try and cash in your options which are now in the money. Before you can do so, unfortunately, the spike reverses back just as fast, meaning that the options you bought are OTM again and near worthless*.

Thoughts?

* ok, the increase in vol, would means these would have increased in value, but not enough to offset the losses from the underlying instrument.

Excellent point and that scenario is entirely possible unfortunately. In fact the reason why I suggested he look at FOP is the longer trading hours. With FXE I could have my stop taken out early in the London session, then price lazily moves back while I watch and by the time New York opens and I can sell the FXE, most of the value is gone. With FOP one could put in a conditional sell order; figuring this out would be fun.

But for me it's just insurance for a situation we all know could go pear shaped but has been dragging on forever so we still want to trade it. If I really thought EUR would head down then I shouldn't be long. Just like insurance, it shouldn't cost too much, the company will look to deny or reduce your claim, but it is better than nothing.

My primary risk control though is reducing position size and leverage. I could lose the max, it would hurt, but it wouldn't wipe me out.

Edit: changed conditional stop to conditional sell order.

 

[justrading]

Yes, I know the move occurred on the 6E. I meant that these moves didn't occur on the stocks and other futures, such as ym, nq,es, at that time. I have only been caught once by ones of these moves. The slippage was 20 pips. These are extremely rapid flash moves. I am surprised nobody has been caught in these.

If I might ask, roughly how often do you see these spikes? It isn't really obvious on 4 hour and daily charts. I recently had a USD.MXN position taken out by a spike, price lingered for a while then went back in the original direction. No U.S. data release and since Mexico isn't on the economic calendar, I figured maybe they had a data release or some Central Banker made a speech, and thought nothing more of it.

I use wider stops, but if there is an initial move against me and then a spike, it could take me out just like the USD.MXN position.

 

[justrading]

On top of that, there's liquidity in the option market itself to concern oneself with even if it doesn't whipsaw back.

Outside RTH I typically see liquidity and spreads are lousy for FOP, though if you can accept the spreads, no reason why retail can't sell unless the floodgates open.

I can't say I have experienced selling puts in a black swan event. I have had one experience in a post-earnings plunge where I had no problem offloading 2 batches of puts for a nett 785% profit, so they were much more expensive than when I bought them the day before.

I would guess the buyers at those prices fell into two groups;

1) those who sold those options and were desperate to cover before things got worse, and
2) those who didn't buy before the fact and were scrambling to get into the action before the underlying fell further.

This was a single experience, so I can't claim to know for sure, but I would hazard a guess human nature is pretty consistent when it comes to fear and greed.

Push comes to shove, if my puts are ITM and I can't sell them, I could also look to buying the underlying to lock in profit, though I would be giving up some serious premium so that would not be ideal.