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how to protect your account from huge catastrophic events.
- Thread starter ONS
- Start date
Quote from ONS:
Thanks wave.
What's the Margin-to-Equity ratio that you would suggest?
But to be honest, even if we don't use any market, if 911 were to happen again, i beleive most overnight portfolios would have be almost grounded to zero, dun you think so?
Conservative <= 10
Aggressive 10-30
if you trade individual stocks or stock options, you need to worry about massive gap-downs overnight.
but for indices, i don't think the market can fall overnight by 20% due to limit down on futures. it may fall 5% overnight then continue to fall when the market opens, but at least you have time to react.
but for indices, i don't think the market can fall overnight by 20% due to limit down on futures. it may fall 5% overnight then continue to fall when the market opens, but at least you have time to react.
Quote from ONS:
My 1R(initial stop) value is normally 2% of my portfolio.
And I only allow 6% of my portfolio to be at risk at any one time.
[...]
Although you are only risking $200 on each position, which accounts to $600, in the event of a major incident just like the 911, all the 3 stocks open at $10 the next day, you get stopped out, and your account turned from 10k into 5k in a single night.
You already answered your own question. Your actual risk is not 2% per trade, but much bigger than that, if you hold them when the markets are closed. 2% risk would be the case if you held your positions only when markets are open.
Your risk model is based on wrong presumptions.
Quote from hilojack:
Why does everyone think that the only catastrophic risk can happen overnight? What if you're a nifty day-trader, and you blink when the oh sh!t button gets pressed? Your over-leverage and that of your mates wipes out the firm. Do day-trade shops and arcades hedge at all?
The overnight risk is much bigger because you can't react to it. Even on days like 9/11, the market traded fairly continuously most of the time, so you could always get out.
The most vicious intraday move I saw was the Jan 2001 surprise Fed rate cut. If you were short a truckload of tech, you probably took about a 20% haircut before you could get out on any size. But then, everyone knew tech was volatile at the time, so only a pretty risk-loving trader would be short 100% tech at that point.
A conservative trader, focused on avoiding blowups, might have lost 5-10% there. Painful but survivable. 9/11 was actually milder - I was long coming into it, and there was plenty of time to get out and even get short (as long as you had access to European and/or pre-open US markets). The market traded pretty continuously 99% of the time.
Now contrast this to something like WWI. The US market got *creamed* overnight by that news. Overnight is definitely a bigger risk.
Quote from blackjack007:
if you trade individual stocks or stock options, you need to worry about massive gap-downs overnight.
but for indices, i don't think the market can fall overnight by 20% due to limit down on futures. it may fall 5% overnight then continue to fall when the market opens, but at least you have time to react.
It can fall 20% overnight. It's very unlikely, but it can definitely happen. Limits are irrelevant - if the cash opens down 20%, then the futures will go down 20%, they will just take a few days to get there. Meanwhile exchange margins will skyrocket and your broker may well demand 100% cash deposits to cover any position you have.
Look at the Dow chart in 1914 to see what can happen overnight.
I think that this conversation has some merit.
It seems as if the 2% rule x 3 for a 6% controlled stake is a reasonable risk portfolio. (Thanks, Van) I think the point about holding the position overnight is reasonable, but don't overstate what the real overnight risk is. It isn't 20% for an index; it may be 20 % for an individual volatile stock.
From an account management standpoint, particularly if you have a smaller account, some of the neat tricks that you can do with a well-funded account aren't as attractive since they tie up too much capital. (Deep in the money options, delta hedging, synthetic conversions) Commissions then become an issue ($200 risk with a $8 commission doesn't sound too good to me, by the way).
I do think that purchasing index puts is a reasonable plan. However, from a practical standpoint:
1) How deep OTM? 5 delta or 20 delta?
2) What length? shortest maturity or next shortest maturity or a longer maturity with the understanding that you won't be as well hedged as you think particularly if things crap out immediately? I've done that personally, thanks. Worked out fine, but again, its that tying up capital thing.
I'm sure there is a perfect answer out there (excluding the serial I.V. risk and interest rate risk over a period of time)
Sometimes when I am not feeling elegant, I'll hedge a portion of my exposure with the double inverse ETF's like TWM or SDS. Idea being that if I take a 50% hedge it only requires 25% of the capital since it is a double inverse. Particularly useful for the 401k & IRA where my choices are more limited.
By the way, I am considering trades of 1 month - 1 year in length.
Any ideas on the above?
It seems as if the 2% rule x 3 for a 6% controlled stake is a reasonable risk portfolio. (Thanks, Van) I think the point about holding the position overnight is reasonable, but don't overstate what the real overnight risk is. It isn't 20% for an index; it may be 20 % for an individual volatile stock.
From an account management standpoint, particularly if you have a smaller account, some of the neat tricks that you can do with a well-funded account aren't as attractive since they tie up too much capital. (Deep in the money options, delta hedging, synthetic conversions) Commissions then become an issue ($200 risk with a $8 commission doesn't sound too good to me, by the way).
I do think that purchasing index puts is a reasonable plan. However, from a practical standpoint:
1) How deep OTM? 5 delta or 20 delta?
2) What length? shortest maturity or next shortest maturity or a longer maturity with the understanding that you won't be as well hedged as you think particularly if things crap out immediately? I've done that personally, thanks. Worked out fine, but again, its that tying up capital thing.
I'm sure there is a perfect answer out there (excluding the serial I.V. risk and interest rate risk over a period of time)
Sometimes when I am not feeling elegant, I'll hedge a portion of my exposure with the double inverse ETF's like TWM or SDS. Idea being that if I take a 50% hedge it only requires 25% of the capital since it is a double inverse. Particularly useful for the 401k & IRA where my choices are more limited.
By the way, I am considering trades of 1 month - 1 year in length.
Any ideas on the above?
I think this is a pretty relevant question with 73% approval rating of Bushco's fraudulent "war on terror". A lot of power is invested in selling fear to the US... The only way to keep the preemptive war drums pounding, is another "terror" attack, like Gingrich and Rumsfeld have been calling for.
Yes there's always the possibility of the overnight hammering, but I think it's elevated now. I've been varying my degree of neutrality. It's been lowering performance, but I sleep better at night...
Yes there's always the possibility of the overnight hammering, but I think it's elevated now. I've been varying my degree of neutrality. It's been lowering performance, but I sleep better at night...