Risk of Catastrophic move in the eminis?

Discussion in 'Index Futures' started by jbob, Nov 16, 2006.

  1. jbob


    I am curious to hear anyone's thoughts about the potential of the emini's to quickly move 5% due to global-political events, trading errors "fat fingers", ect.... I only daytrade eminis and I always use a hard stop when trading, but sometimes I worry as to what would happen for example, if North Korea nuked Japan in the middle of the trading session. Or better yet, what if North Korea nuked the CME and CBOT. Or maybe more realistically, someone accidently tried to buy a million eminis at market. Any of these could lead to a quick 5% move that could completely wipe out 100% of my trading capital if my 2% hard stop was not executed properly. As I have only been trading the eminis for a couple years, I was wondering if anyone had any experience with "fat fingers" or whatever in the earlier low volume days of the eminis and what happened. In addition, how do you deal with or what are your thoughts on limit moves specifically intraday in the eminis.
  2. Truff


    it actually happened a few weeks ago when an accidental bid for 1398 was put in by mistake, alot of accounts were stopped out and liquidated beacuse of the print. Unfortunately there is nothing you can do. One of the risks of trading commodities.
  3. OTM put wings on the eminis
  4. wave



    Could you provide an example of how that might be constructed.

  5. volente_00


    From personal experience, it is not in your best interest to use a limit stop order. I only use market stops.
  6. ddunbar

    ddunbar Guest

    1. If a 5% move could wipe out your account then you are trading too much of your capital to begin with.

    2. If your hard stop is "blown through" you have another "stop" called maintenance margin. When your position breaks below maintenance margin, most brokers, rather than wasting time with a margin call, tend to liquidate your position @ market.

    3. To help get stopped out instead of having a stop blown thrown with fast moves, set your stop limit orders with at least a 8-16 handle difference (2-4 pts) between the stop price and limit price.

    4. Exceedingly rare that a market reverses instantly on news. News does not disseminate instantly to all parties and all parties do not and cannot react to news at the same speed. That means that the market will move in the direction of the news before it's known to all because some will know first and attempt to capitalize on it. This move might occur seconds to minutes ahead of a wide dissemination of the news.

    5. The other thing you have to worry about is market collars. Something new or recent traders haven't experienced. It was a common thing back in the 90's. Might see it again this coming Jan with markets at these levels. What happens, invariably before regular trading hours is that the S&P might go lock limit on you. Nothing you can do until the market bounces back enough for the limit to be lifted. This is one of the reasons why you should not trade your entire account. IF you have enough excess margin, you may be able to hold until the limit is lifted and reduce the loss as the market snaps back somewhat in the ensuing buying frenzy. This is of course assuming that your stop was "blown through" in the action that lead up to the lock limit.
  7. RedDuke


    One of the way to reduce risk is to always have out of the money options equivalent to the clip size you are trading. They should always expire worthless, and you treat them as insurance premium payments.
  8. ddunbar

    ddunbar Guest

    Interesting strategy. Never thought of this one. Will look into it further.

    Red always comes up with gems.
  9. read up on backspreads or verticals
  10. Insurance is not cheap. I usually see it around 1-2% month for NTM options at the time you initiate the trade. A 12-24% cost to trade safely is not insignificant. Spreading can help the cost side but you pay up in the event your insurance "pays off"

    I've never been able to make the numbers work to my satisfaction. I'd be interested in hearing any suggestions in this area as well.
    #10     Nov 16, 2006