Ways to hedge against a heavy loss in extreme situations for a scalper

Discussion in 'Index Futures' started by CALLumbus, May 18, 2018.

  1. CALLumbus



    I scalp very shortterm in the main index futures (FDAX, FESX, NQ, ES). Since I go for pretty small scalps, my position size usually gets somewhat large, relative to my account size.

    If I would loose control over a position during a heavy move, it could mean serious trouble for me. Loosing control could happen by loosing connection to the exchange, for whatever reason, be it my power supply, my internet connection, problems at broker/ FCM or problems at the exchange.

    So far I tried to minimise the risk by the following means:
    - having several internet connections through different providers, both fiber and mobile
    - having several phones ready in case I can only get through to my FCM by phone
    - Uninterruptible Power Supply (UPS)
    - several trading computers, including a notebook that can run on battery
    - backup account with other FCM and other datafeed provider

    I think the technical side I have covered pretty good, dont know what could go wrong there from my side.

    The big question for me is if it is a good/ best way to possibly hedge a position on your main account with a backup account at another FCM.
    Problem is if there is something happening at the exchange, a blackout, then even the other FCM wont be able to help me, I wont be able to reach the exchange and therefore wont be able to open a hedging position.
    And if some real shit like 9/11 or flash crash happens, I could end up getting fuXXed on both accounts, the main one and the backup account, because of some extreme volatility.

    So how do you other shortterm traders, scalpers handle this problem ? I was thinking about using an options trading account as backup, instead of the backup futures trading account. Advantage would be: might have access to hedging instruments (even OTC), even if my futures market has a blackout. Another advantage is that the position on the backup options account could not get completly fuXXed by some extreme volatility in a crazy jumpy market.
    The disadvantages I see with an options account for backup up is: not sure if I will be really able to set up a hedge that covers all or most of my risk, especially in extreme market environments. And the other disadvantage: buying options seems pretty expensive, if I want to hedge most of the risk in a large futures position, I would need a pretty big options trading account.

    Another possible way to limit my risk if something goes completly wrong one day would be to open a corporate account instead of an individual account. Doing that the trading account could be arranged in a way that losses are limited to the capital of the corporation/ LLC. So far I tried to avoid going this way because of the stupid overregulation and bureaucracy for entrepreneurs here in Europe.

    Would be great to hear how other traders handle these risks, maybe you have some good ideas for what I could do.

    Last edited: May 18, 2018
  2. MattZ

    MattZ Sponsor

    In my opinion, you ran through all the possible problems and solutions.
    You are right, if something happens on the exchange level than have two accounts(different data feeds/FCMs) does not help. From your description, it sounds that you have to come to terms that you must trade with a specific size that you feel comfortable with while expecting the unfavorable. Lastly, most FCMs would make you sign a personal guarantee when you open a corp. Account.
    CALLumbus likes this.
  3. truetype


    Open an options account and persistently own strangles to backstop your scalping. There's no other bulletproof cure for trading too big.
    CALLumbus likes this.
  4. All of us who sometimes have big positions on leverage worry a bit about the possibilities. If you're relying upon "quick exit" if things go wrong, but for one reason or another you are unable to act/execute.... seems to me the only way to hedge that possibility is to have a counter/offsetting trade in position at all times.... expensive, of course.
    Last edited: May 18, 2018
    CALLumbus likes this.
  5. tommcginnis


    If the exchange goes down, you are well-and-truly screwed.

    If the local hub(s) go down, you need to find a T1 public connection. For me, it was the local library right up the street. (No lie! My Tax Dollars At Work! So that, when AT&T AND two local cable suppliers both went down [effectively, a single issue that took out the east side of Indianapolis], the local library still had perfectly snappy service. WOWser!)

    Now: your trading profile on the market? When I last scalped for a living (as distinguished from "I am bored today, maybe I'll scalp for a pizza-with-friends tonight...."), I had set up bracket trades, with the specific intention of taking me out of any trade, should I not react fast enough to move those triggers. So, any trade that I *initiated* had an auto-generated exit, which I had to move by hand (ye ol' manual "Yes, I'm alive and here monitoring things" mouse-clicks) to modify. Thus, for good or ill, I was going to be "okay" if signal were lost. (And I have had that happen -- that day I found out about the library and their T1 connection?? Was preceded by me losing signal, testing system, checking with (not-at-home) neighbors, checking with sweetheart [5 miles away and on a different cable system], and literally *running* up the street, now in full-on Panic :wtf: mode. And when I got hooked up? The market had risen and triggered an exit, and all was well. "Sweet!" :))

    Bracket trades!
    CALLumbus likes this.
  6. CALLumbus


    Dear Matt,

    thank you very much for your input. So it seems there is not much potential left for eliminating/ minimising the risk. As both you and @truetype suggest, I will take a closer look now at hedging through an options trading account.

    The personal guarantee you mentioned that most FCMs would demand, does this mean that in case my account goes down deep into the red (sub-zero), I will be liable with all my private assets, even if the account is in the name of a LLC ?
  7. A FCM would be a fool to allow otherwise. Your FCM "stands for all losses", settled-up at the close. If your account is in debit, they will try to collect from you using all means available.

    There is no upside for the FCM to limit loss recovery to the assets of the LLC.
    Last edited: May 18, 2018
  8. CALLumbus


    Brackets make alot of sense, but cannot protect you from all the ugly stuff out there in the trading world. In times of extreme news/ events with a gap in the market, you might get the worst fill you could ever imagine with the brackets. I have not much of a better solution, the reality is, like with most things in life, everything has advantages and disadvantages, but nothing and nobody is perfect.

    But all things considered so far it makes lots of sense to me to look closer at the possibility of hedging with options. Not perfect, but has many advantages. The bad part about this is that it is pretty expensive and capital intensive :(
  9. CALLumbus


    I understand this. But why are there then corp. accounts at all, if at the end of the day there is again a private, individual person that is liable for everything ? The sense of a LLC or GmbH is exactly that, to limit the losses to what a company has in capital. This is accepted by law and in general business life, if I make a very bad deal with my LLC or GmbH, none of the creditors could come to me and try to get something from my private assets. Why is it different with FCMs ?
  10. CALLumbus


    Truetype, thanks for the input. You are an options trader ? Is there a good options broker you could recommend ?
    #10     May 18, 2018