Is there anyone here that had trades on during the flash crashes of 2010, 2015, forex, etc. I'm wondering if anyone or even if professional traders use options to hedge against things like this? Ie if you were long your stop would have been filled at a very low price wiping out accounts using even low portions of margin if you traded the unlucky stock eg Accenture
Sell a call and buy a put 1:1 to your trade so it's like a bracket order but less stingy on price touches and also an almost free hedge.
More referring to day trading though. If I had to put options on every time it would add a lot to the process and commissions. I guess a day trade with a fairly tight stop would still be filled quick enough to prevent a drastic loss? Now that spoofing is banned you'd think it's less likely but HFT and AI is on the increase
The whole problem with the flash crash is your stop may not get executed. Even stop market orders are not guaranteed. The only thing that's guaranteed (sort of) is that your put will gain in value when the underlying plummets. Now if there are no bids for the put, then that's yet another problem so you want to be in a liquid market.
The stop may not be executed at the exact price but in that sort of scenario anything close shortly after might be ok. I trade with 1:3 margin so in the recent flash crashes the market dropped 5-10%? Id be looking at an account drop of 15-30 worst case? Unless of course something worse happens in the future or you're reading that one stock that drops to zero! How much on average is a put on the index (spy or other) worth for that kind of drop? Other problem is it could drop and not hit your price
I am not sure if it's what @nooby_mcnoob meant, but I was thinking that if you establish such bracket with 30 DTE or so, you can use it to day trade for a month as long as stock is not moving outside of the band. This would work best if you trade same set of stocks.
Option trades can be busted, especially when there is a lot of volatility. If you buy for example a put with premium of 0,50 dollars and a flash crash happens, and your premium is 20 or 50 dollars 30 minutes later, you have a great probability it will be busted.
I don't think everyone is clear on the concept: a 'flash crash' is not just a sharp drop, but a likewise sharp recovery. A put purchased 5% OTM would jack up in price as the market approached, and then deflate almost as quickly as the market recovered, but this time have eaten a boatload of value. Not fun, unless you have a sitting high-profit exit order (as some have discussed).
So, it's not really worth it then. I should add most of my trades are intraday with stops no more than $0.5 away usually less. I'm assuming they would be filled first even in the event of a crash way before it got to 5-10% down. In the 2010, 2015 crash it was over 30mins or so? And to add that spoofing, which likely caused it has been banned. I'm sure it still happens or another way will be found as things move towards more and more automation...