I trade futures (mostly ES and ER E-minis) and tend to hold positions overnight and on weekends. As a result, Iâm concerned about the impact of some major piece of news that might occur when Iâm asleep, or when the market is closed on a weekend. (think of what would happen to US markets if someone sets off a nuclear device in London overnight, just to pick one of zillions of nasty possibilities)
Up to now, my trading has been fairly small in scale, and my protection has been limited to stop orders, which would be pretty useless in a situation like Iâm thinking of. As I scale up my trading, the need for effective protection becomes more important.
Iâm basically thinking of buying way OTM puts (one per contract) to provide a type of crash insurance. Iâm looking at puts that are about 10% down from the market. If you are willing to buy these with about a month left before expiry, they donât seem too expensive. For example, I paid 2.2 points on a March 625 put on the ER mini this morning. If I do six trades over the next month, averaging 6 points profit each, that level of protection would cost me about 6% of my total profits, which seems reasonable.
Of course, this type of insurance has a high deductible â Iâve got to be willing to absorb the first 10% of any crash. So again using the ER contract, thatâs a 70-point hit, or $7,000/E-mini. The margins in my account can handle that OK, itâs the next 10% (or more) that I worry about. Thatâs where the puts would come in, of course.
Iâll probably trade short positions ânakedâ, as Iâm not so worried about a gigantic sudden move in the up direction, specially if the US markets arenât open.
While I could sell back the puts whenever I go short, I donât think Iâll do that. The spreads on these are kind of high, and I think itâs easier to just buy them and hold them until they expire. In addition, itâs very hard to buy these after hours, when I usually do my trading in the underlying contracts.
So thatâs my current thinking on crash insurance. Any suggestions for changes and/or alternative approaches would be welcome.
Up to now, my trading has been fairly small in scale, and my protection has been limited to stop orders, which would be pretty useless in a situation like Iâm thinking of. As I scale up my trading, the need for effective protection becomes more important.
Iâm basically thinking of buying way OTM puts (one per contract) to provide a type of crash insurance. Iâm looking at puts that are about 10% down from the market. If you are willing to buy these with about a month left before expiry, they donât seem too expensive. For example, I paid 2.2 points on a March 625 put on the ER mini this morning. If I do six trades over the next month, averaging 6 points profit each, that level of protection would cost me about 6% of my total profits, which seems reasonable.
Of course, this type of insurance has a high deductible â Iâve got to be willing to absorb the first 10% of any crash. So again using the ER contract, thatâs a 70-point hit, or $7,000/E-mini. The margins in my account can handle that OK, itâs the next 10% (or more) that I worry about. Thatâs where the puts would come in, of course.
Iâll probably trade short positions ânakedâ, as Iâm not so worried about a gigantic sudden move in the up direction, specially if the US markets arenât open.
While I could sell back the puts whenever I go short, I donât think Iâll do that. The spreads on these are kind of high, and I think itâs easier to just buy them and hold them until they expire. In addition, itâs very hard to buy these after hours, when I usually do my trading in the underlying contracts.
So thatâs my current thinking on crash insurance. Any suggestions for changes and/or alternative approaches would be welcome.