Ways to hedge against a heavy loss in extreme situations for a scalper

eves_banished_children said:
I don't see how there could be a solution for a huge gap. I mean, if today, right this moment, a nuclear bomb landed somewhere, the people with bids on the market would immediately cut those bids in half (for example). There's simply no way to get out of a trade at the price that was there moments before ... no technology, no anything, the bids just changed, there's no do over for that. I don't see how anyone can "solve" that problem, it's fundamental to the way the market works. Like you said, the only thing you're left with at that point is some kind of a hedge, an options position of some kind or etc. Maybe there's a price point where the options are far enough out of the money that they aren't expensive, but would get fat and ready for harvest if the market gap was large enough to need them ? Out of the money and really close to expiration ?
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You are right, there is no solution for this how you describe it. If you are long in a highly leveraged position, and a nuclear bomb is dropped somewhere, of course you will pay the price for the long position you took. This is the kind of risk that I am willing to accept, this is part of trading and cant be avoided, at least not 100%.

What I want to avoid is a situation in which I loose control when I should not have lost control. No extreme shock event or something like that, but loss of connection to broker, to exchange, datafeed, risks like those. These kind of risks can be avoided, and backup brokers, accounts and instruments are part of this.

If I loose control over my position in the market, even a regular non-farm payroll event with numbers that come very out of line could ruin me. Imagine 10 minutes before non-farm payrolls, I have a position of 80 contracts ES long and I receive a call from my broker that they have a technical problem and I cannot close my position. Non-farm payrolls are no shock event, but if you loose control over your account even such scheduled economic data could ruin you. This is the kind of risk that I want to eliminate. In the past I did this by using a second FCM as a backup. But this combination wont cover all these types of unnecessary risks. Therefore I am having a closer look at options now and will probably open a options trading account as additional backup.
 
CALLumbus said:
Hi,

I scalp very shortterm in the main index futures (FDAX, FESX, NQ, ES). Since I go for pretty small scalps, my position size usually gets somewhat large, relative to my account size.

If I would loose control over a position during a heavy move, it could mean serious trouble for me. Loosing control could happen by loosing connection to the exchange, for whatever reason, be it my power supply, my internet connection, problems at broker/ FCM or problems at the exchange.

So far I tried to minimise the risk by the following means:
- having several internet connections through different providers, both fiber and mobile
- having several phones ready in case I can only get through to my FCM by phone
- Uninterruptible Power Supply (UPS)
- several trading computers, including a notebook that can run on battery
- backup account with other FCM and other datafeed provider

I think the technical side I have covered pretty good, dont know what could go wrong there from my side.

The big question for me is if it is a good/ best way to possibly hedge a position on your main account with a backup account at another FCM.
Problem is if there is something happening at the exchange, a blackout, then even the other FCM wont be able to help me, I wont be able to reach the exchange and therefore wont be able to open a hedging position.
And if some real shit like 9/11 or flash crash happens, I could end up getting fuXXed on both accounts, the main one and the backup account, because of some extreme volatility.

So how do you other shortterm traders, scalpers handle this problem ? I was thinking about using an options trading account as backup, instead of the backup futures trading account. Advantage would be: might have access to hedging instruments (even OTC), even if my futures market has a blackout. Another advantage is that the position on the backup options account could not get completly fuXXed by some extreme volatility in a crazy jumpy market.
The disadvantages I see with an options account for backup up is: not sure if I will be really able to set up a hedge that covers all or most of my risk, especially in extreme market environments. And the other disadvantage: buying options seems pretty expensive, if I want to hedge most of the risk in a large futures position, I would need a pretty big options trading account.

Another possible way to limit my risk if something goes completly wrong one day would be to open a corporate account instead of an individual account. Doing that the trading account could be arranged in a way that losses are limited to the capital of the corporation/ LLC. So far I tried to avoid going this way because of the stupid overregulation and bureaucracy for entrepreneurs here in Europe.

Would be great to hear how other traders handle these risks, maybe you have some good ideas for what I could do.

Greetings,
CALLumbus
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%%
You can buy insurance; or insure it yourself, C columbus.
Having done both i recommend both.NOT a prediction but if you are worried about it+ sounds like you are, cut back your size.Good thing about blowing up an account when young; may live to recover from it?? Another thing about insuring yourself, by trading reasonable size, you get to keep the profit the insurance/option co would have made.
Actually 911 was not a big shock in price;
wartime emotional shock and airlines, on a downtrend gapped down...... + turned around:caution::caution: As you discerned ,you cant cover all of your risk 100%.
 
truetype said:
Yes, there is a solution. Persistently own strangles as a backstop. I'm not sure what part of that is unclear...
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It is clear that it is a solution, it is like an insurance. Of course one will have to pay a price for this. I have not too much knowledge about options so I have no idea what I have to expect. Will for sure have to check this out soon. Thank you for pointing it out again.
 
murray t turtle said:
%%
You can buy insurance; or insure it yourself, C columbus.
Having done both i recommend both.NOT a prediction but if you are worried about it+ sounds like you are, cut back your size.Good thing about blowing up an account when young; may live to recover from it?? Another thing about insuring yourself, by trading reasonable size, you get to keep the profit the insurance/option co would have made.
Actually 911 was not a big shock in price;
wartime emotional shock and airlines, on a downtrend gapped down...... + turned around:caution::caution: As you discerned ,you cant cover all of your risk 100%.
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Thank you for your input. Food for thought...


With your view on 911 however I dont agree:

"Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks, the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since 1933. Moreover, many trading, brokerage, and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.

On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline, setting a record for the biggest loss in exchange history for one trading day. At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down almost 1,370 points, representing a loss of over 14%. The Standard and Poor's (S&P) index lost 11.6%. An estimated $1.4 trillion in value was lost in those five days of trading."

I would not like to be trapped in a position in such a situation :-//
 
CALLumbus said:
Thank you for your input. Food for thought...


With your view on 911 however I dont agree:

"Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks, the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since 1933. Moreover, many trading, brokerage, and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.

On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline, setting a record for the biggest loss in exchange history for one trading day. At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down almost 1,370 points, representing a loss of over 14%. The Standard and Poor's (S&P) index lost 11.6%. An estimated $1.4 trillion in value was lost in those five days of trading."

I would not like to be trapped in a position in such a situation :-//
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%% Trapped????
Thats my point; the trend was down; + went down more
 
murray t turtle said:
%% Trapped????
Thats my point; the trend was down; + went down more
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Yes, I see your point. A longterm trend follower would probably not have been trapped, or even if he would have been trapped he maybe would have not cared that much about it. But for a longterm trendfollower the risk that I discuss here, the risk of a highly leveraged scalper, is not really relevant. He would maybe have had a short position of 2 to 5 emini futures and just have surfed down the wave. A shortterm scalper like me, with the same risk capital of that longterm trader, would have maybe scalped on that day, several times a day, both long and short (who cares about the longterm trend as a scalper :cool:) with a clip size of something like 50 emini futures contracts. And thats the difference: if the longterm trader gets stuck in his position, for whatever reason, he has a much smaller position on than the scalper/ shortterm trader and therefore much less risk. It is just a completly different world.
 
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