Should we self-insure?

TGregg

TGregg

Imagine one is long, say 30 ES (that's ~$1,650,000.00 worth of S&P futures) and the Bad Guys nuke New York and Chicago, and Globex halts for 4 weeks. It finally reopens down 500 points (a tad less than -50%). That's a loss of $750,000.00 AKA three quarters of a million.

Now the daily margin to trade ES is ~2k at IB. So one could have an account of only 60k and be short 30 contracts. Then owe $690,000.00 in addition to their account, most likely wiping one out entirely. So that makes me wonder if it's worthwhile to buy some ES (or other?) contracts to cover one's butt in case of emergency. One could incorporate that as a cost of doing business. And one would be insured upside and down. Seems worth considering. I have no idea about the cost tho.
 
Quote from TGregg:

Imagine one is long, say 30 ES (that's ~$1,650,000.00 worth of S&P futures) and the Bad Guys nuke New York and Chicago, and Globex halts for 4 weeks. It finally reopens down 500 points (a tad less than -50%). That's a loss of $750,000.00 AKA three quarters of a million.

Now the daily margin to trade ES is ~2k at IB. So one could have an account of only 60k and be short 30 contracts. Then owe $690,000.00 in addition to their account, most likely wiping one out entirely. So that makes me wonder if it's worthwhile to buy some ES (or other?) contracts to cover one's butt in case of emergency. One could incorporate that as a cost of doing business. And one would be insured upside and down. Seems worth considering. I have no idea about the cost tho.
More...

imagine if you dont know the answer already you have no business trading sixe :-/
 
Tgregg,

in the case you describe it is highly
likely that the futures exchanges would
find an "arbitration regulation", where
the shorts would not get their full profits
paid out. (instead, only a fraction)
 
Quote from saschabr:

Tgregg,

in the case you describe it is highly
likely that the futures exchanges would
find an "arbitration regulation", where
the shorts would not get their full profits
paid out. (instead, only a fraction)
More...

Also Tgregg has an automatic solution for all time it turns out.

He could set a stop for entering short offset a reasonable distance from the contemporary operating point. It would only be used when he encountered catastrophe.

911 was a good example. I turned on the TV in response to market action that day. Tgregg would have been out were he long. Or if short, he would have been in a good place.

In a milder manner, he could trade with such protection for both eventualities, disaster and unexpected advances.

AMT is a good example for a non segmented account.

The better example is running a segmented account on at least three fractals.
setting catastrophic stops on all three would be a great backup for the normal trading stops one would not happen to have in place.

An electronic malfunction could be an initiating event but it is moe likely another thing will cause a shutdown over a short period of time. See 911 events.
 
Sas, what kind of arb agreement are you talking about?

I spoke to my broker the other day, the shorts will get paid out. The broker can go bancrupt but the funds are segregated.

You get paid in full on the short. It is not insured like a stock is insured, but they have to pay you in full.

Remember that futures were not intended for speculative trading. They were intended for portfolio hedging.

If a fund manager has a huge 100M stock portfolio and he hedges with short SPs that would make him 100M if we get nuked, then he must get paid.

If futures do not get paid out then there is absolutely no point in having them because they are supposed to be for hedging purposes.
 
The exchanges have to protect integrity of the financial systems.

Such a thing never happened, so it is difficult to speculate about real-situation solutions.

I am a licensed and during some theoretical seminars we were taught of such possibilities, however, not in depth.

A possibility would be that an arbitrary position entry price would be set. E.G.
a buyer & seller matched originally @ 1120. Both get the entry price adjusted to 720.

This is done to prevent blowing away the entire margining system in order to protect financial system stability during extraordinary events.
 
How could all the shorts be paid? If there isn't sufficient capital in the long's accounts, they will receive a margin call. Except they don't have the money and declare bankrupcy erasing the debt.
 
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