I am curious to hear anyone's thoughts about the potential of the emini's to quickly move 5% due to global-political events, trading errors "fat fingers", ect.... I only daytrade eminis and I always use a hard stop when trading, but sometimes I worry as to what would happen for example, if North Korea nuked Japan in the middle of the trading session. Or better yet, what if North Korea nuked the CME and CBOT. Or maybe more realistically, someone accidently tried to buy a million eminis at market. Any of these could lead to a quick 5% move that could completely wipe out 100% of my trading capital if my 2% hard stop was not executed properly. As I have only been trading the eminis for a couple years, I was wondering if anyone had any experience with "fat fingers" or whatever in the earlier low volume days of the eminis and what happened. In addition, how do you deal with or what are your thoughts on limit moves specifically intraday in the eminis.
Risk of Catastrophic move in the eminis?
- Thread starter jbob
- Start date
OTM put wings on the eminis
From personal experience, it is not in your best interest to use a limit stop order. I only use market stops.
1. If a 5% move could wipe out your account then you are trading too much of your capital to begin with.
2. If your hard stop is "blown through" you have another "stop" called maintenance margin. When your position breaks below maintenance margin, most brokers, rather than wasting time with a margin call, tend to liquidate your position @ market.
3. To help get stopped out instead of having a stop blown thrown with fast moves, set your stop limit orders with at least a 8-16 handle difference (2-4 pts) between the stop price and limit price.
4. Exceedingly rare that a market reverses instantly on news. News does not disseminate instantly to all parties and all parties do not and cannot react to news at the same speed. That means that the market will move in the direction of the news before it's known to all because some will know first and attempt to capitalize on it. This move might occur seconds to minutes ahead of a wide dissemination of the news.
5. The other thing you have to worry about is market collars. Something new or recent traders haven't experienced. It was a common thing back in the 90's. Might see it again this coming Jan with markets at these levels. What happens, invariably before regular trading hours is that the S&P might go lock limit on you. Nothing you can do until the market bounces back enough for the limit to be lifted. This is one of the reasons why you should not trade your entire account. IF you have enough excess margin, you may be able to hold until the limit is lifted and reduce the loss as the market snaps back somewhat in the ensuing buying frenzy. This is of course assuming that your stop was "blown through" in the action that lead up to the lock limit.
2. If your hard stop is "blown through" you have another "stop" called maintenance margin. When your position breaks below maintenance margin, most brokers, rather than wasting time with a margin call, tend to liquidate your position @ market.
3. To help get stopped out instead of having a stop blown thrown with fast moves, set your stop limit orders with at least a 8-16 handle difference (2-4 pts) between the stop price and limit price.
4. Exceedingly rare that a market reverses instantly on news. News does not disseminate instantly to all parties and all parties do not and cannot react to news at the same speed. That means that the market will move in the direction of the news before it's known to all because some will know first and attempt to capitalize on it. This move might occur seconds to minutes ahead of a wide dissemination of the news.
5. The other thing you have to worry about is market collars. Something new or recent traders haven't experienced. It was a common thing back in the 90's. Might see it again this coming Jan with markets at these levels. What happens, invariably before regular trading hours is that the S&P might go lock limit on you. Nothing you can do until the market bounces back enough for the limit to be lifted. This is one of the reasons why you should not trade your entire account. IF you have enough excess margin, you may be able to hold until the limit is lifted and reduce the loss as the market snaps back somewhat in the ensuing buying frenzy. This is of course assuming that your stop was "blown through" in the action that lead up to the lock limit.
read up on backspreads or verticals
Insurance is not cheap. I usually see it around 1-2% month for NTM options at the time you initiate the trade. A 12-24% cost to trade safely is not insignificant. Spreading can help the cost side but you pay up in the event your insurance "pays off"
I've never been able to make the numbers work to my satisfaction. I'd be interested in hearing any suggestions in this area as well.