Tip. You Can Trade Futures In Limit Down/up

Discussion in 'Trading' started by jaytrader100, Sep 15, 2008.

  1. HOPE THIS little tid bit of knowledge comes in handy for futures traders..it is old so the limit values are INCORRECT. I DID NOT WRITE THIS TOOK IT FROM THE NET FOR YOU

    Spread It Out

    One approach to neutralizing loss in a limit-move situation is to trade a spread in the same commodity in a back month that is not limit-locked to achieve an offset. For example, if you are short March cotton and the market has locked its 3-cent limit against you, but the October contract is still trading because it is not locked, you can buy a March/October spread. In this spread trade, you buy the March contract and sell the October contract. After you have established the spread, you then buy back the October cotton, effectively offsetting your March position. You should be able to initiate a spread in any locked market this way. The spreads will generally be more expensive then the limit down level, but the additional cost is usually worth the risk of getting stuck in a second, or in multiple, locked-limit days.

    You can also just take the opposite position in a back month that is not locked, creating a spread. This can help limit, although not perfectly offset, additional downside risk. Also, a spread may not work in the manner expected. In agriculture markets, for instance, be careful of different crop years, which might not be correlated with the market you are locked up in and may be responding to totally different fundamental conditions.

    Using Options To Lock In A Loss

    If an underlying futures is locked but options in the futures are not locked, you can create a synthetic position for the futures in the options market. A synthetic is a combination position that has the same value in terms of gain as the underlying futures and is used in a limit up or limit down market to lock in a loss.

    Say you are short New York crude oil futures and are caught in a limit up move (a move greater than 1.50 per barrel). You can create a position that, although it will not shield you from the limit move that has already occurred, will offset any further loss. You create a synthetic long position by buying a call option and selling a put option at the same strike price. Conversely, if you are long crude oil in a limit down situation, you can neutralize any further loss by simultaneously buying a put option and selling a call option at the same strike price to create a synthetic short position.

    Options have limit-locked levels as well. Although you may not be able to create a synthetic at the exact price (at-the-money or in-the-money) of the limit level, you should be able to create a synthetic position slightly out-of-the-money. As Art Liming, Senior Broker at Lind-Plus described, "You find out your options quotes at different strikes and then compare the prices to determine how much of the risk you want to take away." In more liquid markets you will get better fills than in less liquid markets. For example, you are more likely to get a better price for soybeans options that are limit-locked than lean hogs options.

    As these straightforward strategies show, the consequences of locked futures markets are not the end of the world. But as with every good risk management plan and every good (risk-hawkish) trade, begin by preparing for the worst-case scenario.

  2. Shaqi


    the trick here is how and when you get out of both positions.

    if act like a rabbit you will have a double whamy loss.
  3. nope as long as you open the position as a spread you can always close it as a spread
  4. Shaqi


  5. no offense but you are missing my point here..

    If you ahve outright futures position .i.e. long 5 es

    and mkt is lock limit down you can not liquidate or offset

    if you have a SPREAD ON in the ES then you can LIQUIDATE EVEN IF ES is lock limit down!!!!!!!

    BONAFIDE SPREAD TRADES DO NOT LOCK.. that is why you should alwasy specify to FCm/clearing that you are putting on a spread especially if tis electronic..
  6. Shaqi


    But you are not opening the position as a spread.

    The 1st trade is a naked say short position

    then after sometime the position goes against you, then you scramble to open a 2nd position say long of the same commodity creating a calendar spread.

    the opening is at different times, so you close out also at different times

  7. Shaqi


    close out at different times if you elect this option. you can closeout same time if you wish -

    but dont assume % move in in the different months will be same - one might move 3% the other 2.8% and so on

    its not a surefirething - yeh but it can save you hide - like recently wehn wheat went limit up something like 4 days in a row
  8. Shaqi


    If your broker knows what he is doing - even in electronic markets he should have different symbols for strategies like the ones you on about - otherwise you if you open two positions at diffrent times - long & short same commodity but different expiry months you could end up holding the bag if you close out one position and assume both positions are closed

  9. if you read what i wrote i said.."when you open a spread position.. i did not say leg into or out of..

    Strictly opening and closing as a spread
  10. Shaqi


    I was responding to the statement you made below. That position is not spread from the beginning- its a naked position which you then hedge after being caught locked limit. Its the wording which implies that. But I understand your point. Kudos!!!

    #10     Sep 15, 2008