Does anyone here hedge against a total intraday market crash a la 1987. If so, how do you hedge? If not, whats your logic in not hedging, and especially if you are using leverage?
Ok, not holding over the weekend protects you over the weekend, but im talking about an intraday market crash during regular market hours
With the electronic round the clock trading nowadays, I feel comfortable with my stop in even when long during the week. I will, by the way, hold ES short over the weekend without any worries for just the reason that I might catch an 87 surprise again.
I guess I should correct part of this statement. From a technicians perspective , there was no surprise in 87 except for the degree of the decline.
It's funny when this topic comes up - I came from a profession where my whole profession centered around worst case scenarios. So it is so deeply ingrained in my blood to "prepare for the worst." I would never have a sizable long porfolio that is not hedged by some combination of puts. Also, I will never trade anything that is leveraged with unlimited risk. That means naked puts, ES futures etc. Just my style. I go to sleep with full knowledge of my max possible loss. Stops (just a market order)will not save you from a massive gap down opening. I also keep a sizable amount of trades which are straight long puts, i.e., shorting without the unlimited risk. I love it when the market tanks.
I do want to mention one thing here about stops in today's market. The stop is in during the night . I am not certain there is such a thing as an opening gap anymore except on Sunday night.
I think if youre in the market most of the time, the probability of a market crash happening at some point during your lifetime is not negligible at all. Also, i think we cannot assume that execution quality in a market crash will be anything like the execution quality we take for granted on a normal day. To compound the problem, computer systems may well totally fail in a market crash, just look what happened to Tokyo recently. http://news.morningstar.com/news/DJ/M01/D18/200601181527DOWJONESDJONLINE000992.html To summarize, I don't think its smart to turn a blind eye to this if youre in the market most of the time, and i dont think having stops is sufficient, although i cannot prove it.