Saying we're limit up in Corn for example, and I'm stuck with a short position, because the options on corn don't have the same limit day mechanisms that the futures have, I could theoretically go long synthetically to get out... now the question is, for those that know the markets with limit restrictions, is it even possible, and if it is, which options do you use? the ATM strikes around the limit price? What way do the options on corn (or other ags, softs, meats etc) behave in such times? do the premiums skyrocket so much that it isn't worth ones while? slippage etc? forgive the muddled thinking behind this. I just about understand synthetics and am looking for applications of it...
1) Read the contract spec's. 2) Corn futures AND corn options have a 30-cent limit, except for the spot-month futures AND on the last trading day of the options. 3) If the futures lock limit-up against you, you could put on a synthetic-long position via the options for "damage control". 4) Depending on how quickly you can react, you would be best off using the strike price that is (ATM) at-the-money or the next (OTM) out-of-the-money. 5) Instead of options, you could trade the spot-month future if it's still available, if you feel comfortable trading it and your clearing firm doesn't object. 6) When futures lock-limit and traders then "rush" into the options, premiums can explode and bid-ask spreads can widen out. 7) Price limits are large enough so that you should never let a losing position go that "far" against you in one day.
perfect, thanks Nazzdack don't know where I got the idea that the options were immune from the lock limit rules.
Minn Wheat was trading 2 and 3 bucks higher than the lock limit up bit last feb/march via synthetic options with .20 and .40 wide bid asks...it can happen.
Been on the wrong side of lock limit before, its not funny at all, but great and instant learning experience....
Not always Nazz - Without giving a reason why, you could enter a new position short showing only a small loss before lock limit up in matter of seconds. I know you could say check % price change in a day before initiating position - im just giving an example how this could happen. But if caught in a lock limit position - if you can ride it out with a hegde at another exchange with similar futures contract or create a calendar spread using a different month. Options at those times are wild and you pay way too much
doh, didn't even think of spreading it off with a different month / correlated contract.. that would seem much more sensible
1) True. Ideally, you're not "stuck" with an overnight position that gaps, lock up-limit, against you when a market is closed. 2) If you're initiating new, short, positions during the day and the market continually marches higher against you, probably in the face of "extreme" news, that may be easier to deal with if you are willing to get out before the market gets "too close" to the limit and you don't want to risk multiple, consecutive, lock-limit moves against your account.