how to protect your account from huge catastrophic events.

Discussion in 'Risk Management' started by ONS, Jun 9, 2008.

  1. ONS


    The more i think about it, the more i'm afraid of getting my whole account burnt, and that's why, I would like to talk about this topic, and listen to everyone else's opinion.

    Let's use my case as an example.

    My 1R(initial stop) value is normally 2% of my portfolio.
    And I only allow 6% of my portfolio to be at risk at any one time.

    Let's say u have a 10k account, and you traded a stock at $20, with the initial SL at $19. Your risk is $1, sizing will be $200/$1 = 200shares.

    To make things short, let's just say, u are holding 3 positions exactly the same as the above stated criteria. Same price, same risk, same size.

    Although you are only risking $200 on each position, which accounts to $600, in the event of a major incident just like the 911, all the 3 stocks open at $10 the next day, you get stopped out, and your account turned from 10k into 5k in a single night.

    I was thinking of buying some cheap options to hedge against my long positions. No doubt it will reduce the return on every trade, it pays as an insurance to this kind of unforeseen huge events. I'm not sure whether it works well, just something that came across my mind.

    Is there a way to take care of this?
    Anyone using any other means of protection?
    Please share. Would greatly appreciate that.
  2. Long a stock and long a put option is the same position as just being long a call option.

    If you are that worried about risk maybe you shouldn't be speculating in the markets.
  3. Fear is a source of wisdom! :)
  4. ONS


    Hi Jeb,

    thanks for the feedback.
    But i think you got me wrong.
    No, I'm not saying that I'm afraid of loosing money.

    I'm prepared to loose the initial Risk (R) on my trades, as they are part of my business cost. But loosing almost the entire chunk of my portfolio???

    That's what I'm trying to prevent. And I'm humbly searching for any feedback from anyone kind enough out there that can provide me with any kind of ideas.
  5. ONS


    Thanks for dropping by OddTrader.
    Any advice please?
  6. A fear of the markets is the best source of wisdoms in trading!

    You've already got that, seemingly!

    Just Don't easily give in! :D
  7. wave


    Risk is always about the loss that you would suffer if market prices changed, so you take the positions you have and see what happens if prices change by a fixed amount. But what is the size of the change? What is the likelihood of a change of a particular size occurring? VAR signifies the maximum amount you could lose as a result of market price moves.

    Keep your Margin-to-Equity Ratios in check and you will likely survive the fat tails.
  8. What about day trading "portfolios"? Does anyone hedge those? What about the guys who run prop groups? If you have a group of 20 traders trading at 20x leverage and something catastrophic happens, can you survive? Do you have guys trading negatively corrolated instruments? Do you buy put options just in case? Just curious, as I think this is more of a problem then someone who has a more traditional portfolio because those can be hedged with options. Thoughts?
  9. taowave


    Jeb is correct assuming that you buy puts on the specific names that you are long.As it appears that you are more concerned with market risk than specific risk,you could/should buy index puts against our portfolio.

    There are several things you should think about.For starters,how well does you portfolio correlate to the index you are buying puts on??Do you want to hedge on an equal dollar basis or beta adjusted?? Are you looking for ATM insurance or OTM??

    I am assuming you are a position trader as you are concerned with overnight risk.I trade all my portfolios with some sort of derivative hedge,and have no problem taking correlation risk.

  10. ONS


    Thanks wave.
    What's the Margin-to-Equity ratio that you would suggest?

    But to be honest, even if we don't use any market, if 911 were to happen again, i beleive most overnight portfolios would have be almost grounded to zero, dun you think so?
    #10     Jun 9, 2008