What risk management lessons to learn from negative oil price event?

[systematictrader]

This negative oil price event is unprecedented. It surprised even veteran oil traders with decades of experience.

It has shaken conservative people who thought their risk management rules will protect them from financial markets.

One popular risk management rule is not to risk more than 1% of your equity. This rule won't protect you from negative oil price if you're caught in it. Imagine on that fateful day, you bought oil at $0.10. You thought you got bargain of a lifetime and who can argue with you over that? Soon, oil slipped to -$37. Many traders were not able to get out of their positions when oil price went negative because the brokerage software got confused and did not allow orders to go through for negative prices. Gosh. You're dead many times over since you lost many times your principle. Even a well-capitalised trader putting on a small position will blow up his account.

So, what risk management lessons do you learn from this -ve oil episode?

What new rule would you add to your risk management rulebook to protect yourself from similar events in future?

Well one thing one can think of in hindsight is always use deep in the money options thats the closest thing you can get to delta 1 without paying too much extrinsic, funny thing i always do that but in oil i figures its too low, no point in paying extrinsic. But this is just a trivial item

i think a bigger and bigger item that i cant help but think,( also in hindsight) but even if i thought of at the time i wouldn't have the nerve to pull the trigger is that when the record production cut was announced i believe it was several days before the negative Monday, prices continued to drop, i believe that in it self was a massive flag this thing will
Collapse to zero if one didnt know negative is possible Still from 17 to zero is a big drop
People tend to over look that because it went negative none the less i do NOT recall or believe there was a drop of this magnitude before from 17 to 2 bucks lets say or was there percentage basis ?

once again even if i saw thought of it i wouldn't have had the nerve to short at 17, yet someone who listens and is emotionless i believe would've and with that got lucky with it going negative, assuming he is a swing trader and didnt finger with his position intraday, i guess as tom Baldwin say, the harder u work the luckier u get

at the same time this reminds me a Larry hite story when the gulf war broke out in the 90s and gold barely made a move upwards, and he said to himself “ a middle east war just broke out and all gold can do is move 10 cents” he shorted it supposedly and made a fortune

its one thing to learn the lesson , its another to know it, its even another to apply it, thats why 65% of the population is over weight even though they all know the trick to lose weight is eat less exercise more, knowledge is not power, applying knowledge is

thats also why many people here post accurate stuff yet very few even themselves apply it.

 

[systematictrader]

This negative oil price event is unprecedented. It surprised even veteran oil traders with decades of experience.

It has shaken conservative people who thought their risk management rules will protect them from financial markets.

One popular risk management rule is not to risk more than 1% of your equity. This rule won't protect you from negative oil price if you're caught in it. Imagine on that fateful day, you bought oil at $0.10. You thought you got bargain of a lifetime and who can argue with you over that? Soon, oil slipped to -$37. Many traders were not able to get out of their positions when oil price went negative because the brokerage software got confused and did not allow orders to go through for negative prices. Gosh. You're dead many times over since you lost many times your principle. Even a well-capitalised trader putting on a small position will blow up his account.

So, what risk management lessons do you learn from this -ve oil episode?

What new rule would you add to your risk management rulebook to protect yourself from similar events in future?

None the less CME to be unbiased did make an announcement before that it can go negative

so a lesson one would lear before or after is the instrument is bottomless perhaps one would tones it down to a much smaller position being you can not calculate the notional value of the contract

 

[systematictrader]

Understand settlement of any product you trade. I do not believe the veteran energy community was surprised - whether it's physical delivery, American options, cheapest to deliver - understand delivery. Putting a very small percentage of your portfolio into a poorly thought out idea is stupid.
Assume the veterans and the pros are the ones that are going to use you as fodder!

Understand delivery would've helped how ? Before the fact?

interest rates went negative in germany whats the delivery there if there is any to understand and what can it do for u?

And understanding it doesnt necessarily tell you it can go negative

 

[Genevian Speculator]

well its simple, if the market goes bollocks, step aside, let the HFT's win as they will anyways.

 

[Snuskpelle]

In some old code I used to have negative prices in my variables indicate some special condition like "no price yet received". Suffice to say I am never going to do that again.

 

[ph1l]

In some old code I used to have negative prices in my variables indicate some special condition like "no price yet received". Suffice to say I am never going to do that again.

I do that sometimes with numbers unlikely to happen in real life such as -666666666.

 

[murray t turtle]

And to add to your very good point about the settlement, also understand that physical commodities can go negative. I believe it was Nat Gas that was negative in a Texas hub in May 2019, and although this was not reflected in the exchange, it happened in the physical market.

When refineries cant hold more than a certain number of barrels, I guess they will pay you to hold it for them(?).

The lesson is not just oil, rather any physical commodity that may require storage.

As far as risk management, you can no longer say that the downside is limited.

%%
Good points;and as someone @ Don Bright Daytrading noted= leverage is a 2 edged sword.
That;
+ that is why for many years they ''flared'' the gas @ the well.May have seen the pics; looks like a huge burning candle. As good as T Boone Pickens was, he lost one of his nat gas companies+ he was in that business most of his life...………………………………………………………………………...

 

[Alexpung]

These are conclusions after the fact. Even people who "Know" do not know what happens to liquidity or spreads to take advantage of such situations, in other words, when prices fall below zero.
CL futures are trading since 1983 and never been negative, so even the traders with a better assessment (as you say) would not take the risk on such a move.

The number of contracts that traded below zero was not high, and in my opinion, these were just shorts (hedges) from previous days or those who wanted to take delivery.

No, I mean even before the fact people that DO know it can be negative have an advantage over those who don't. Just like in poker the pro do not always win and the fish get some chance, but in the long run it is sure win for the pro.

I saw screenshots of Chinese investors that lost $1M+ with OTC oil product because they got greedy and have no clue what they were buying. If you know it can go negative at the very least you would not have bought that much.

 

[SimpleMeLike]

This negative oil price event is unprecedented. It surprised even veteran oil traders with decades of experience.

It has shaken conservative people who thought their risk management rules will protect them from financial markets.

One popular risk management rule is not to risk more than 1% of your equity. This rule won't protect you from negative oil price if you're caught in it. Imagine on that fateful day, you bought oil at $0.10. You thought you got bargain of a lifetime and who can argue with you over that? Soon, oil slipped to -$37. Many traders were not able to get out of their positions when oil price went negative because the brokerage software got confused and did not allow orders to go through for negative prices. Gosh. You're dead many times over since you lost many times your principle. Even a well-capitalised trader putting on a small position will blow up his account.

So, what risk management lessons do you learn from this -ve oil episode?

What new rule would you add to your risk management rulebook to protect yourself from similar events in future?

helpme_please,

There is NO lesson to be learned to a professional trader because price went negative.

I been trading CL everyday for 2 years. If you seriously trade everyday, then you are not stupid, you know when to trade and when not to trade. If you bullshitting around getting all excited trying to hit a quick a lick to brag to your buddies and co workers and forum buddies, then the market going to push your shit back. The market has a cake baked for those who is careless with risk.

I did not have problem trading CL when it went to $-37 because I use the right stop loss placement on that day just like I do any other day.

I did not care at all CL went to -$37. I just want to get the trade right, make the money and close my DOM.

It is too much news bullshit going on lately. Who cares if CL went to $-37 or $1000 in one day.

I just want to focus on my trades and make some money man. I don't care if CL goes to $200 on Monday or -$200, ALL I care about is did I make money while it goes either way. That is it. I don't even care why CL went negative, just want to get the trade right.

I no longer care "the why" of things. All I care about is did my PnL show green or red today. I want it to show green consistently as possible and watching the price daily.

Reading all that news stuff is a waste of time.

 

[helpme_please]

May I ask which broker were you using to trade CL when prices went negative?

helpme_please,

There is NO lesson to be learned to a professional trader because price went negative.

I been trading CL everyday for 2 years. If you seriously trade everyday, then you are not stupid, you know when to trade and when not to trade. If you bullshitting around getting all excited trying to hit a quick a lick to brag to your buddies and co workers and forum buddies, then the market going to push your shit back. The market has a cake baked for those who is careless with risk.

I did not have problem trading CL when it went to $-37 because I use the right stop loss placement on that day just like I do any other day.

I did not care at all CL went to -$37. I just want to get the trade right, make the money and close my DOM.

It is too much news bullshit going on lately. Who cares if CL went to $-37 or $1000 in one day.

I just want to focus on my trades and make some money man. I don't care if CL goes to $200 on Monday or -$200, ALL I care about is did I make money while it goes either way. That is it. I don't even care why CL went negative, just want to get the trade right.

I no longer care "the why" of things. All I care about is did my PnL show green or red today. I want it to show green consistently as possible and watching the price daily.

Reading all that news stuff is a waste of time.