Thanks, I guess I will have to picture mentally that, in the worst case scenario I could lose say 50% of the notional value of the contract, around $31 K at the moment, but that it's highly unlikely. I will always operate with a stop, even if it's a panic stop far from entry.
Thanks, this is something I still have to look into (hedging with options). As said in a previous post, I will picture a max. 50% loss and if I can live with that, then trade. The nucleat attack is a reasonable example. We all know we are due for a major terrorist attack sometime in Europe or North America.
You asked a very straightforward question and although you got some good replies I noticed no one came out and gave you a straight answer. Yes, you are correct, if you go long 1 YM contract your maximum loss is 5 * the price, approx $62k right now. If you are short 1 YM contact as someone else alluded to then the losses are not bounded because there is no limit on how much it could rise. Talk about circuit breakers and your broker liquidating you assume that there is someone to take the other side of the trade - there is no guarantee of that although obviously for YM to go to (or approach) zero probably means you have bigger things to worry about then paying back your broker....
Thanks everyone, I think it's all clear now. And yes, a 100% drop would mean I'd probably be "busy" with other more urgent things...
The Dow going to zero isn't the worst case scenario. It is also farcically unlikely. What is more likely, and a worse case scenario, is the Dow going to 50,000 while you are short. Or higher. He who sells what isn't his'n... Yes...the exchanges, trade publications, various websites, data vendors, etc. However this information does not assist in predicting magnitude of future swings. Only one thing is for sure - in the future, the Dow will break a new record for volatility on a daily or hourly interval basis. Make sure that you can stump up at least 2x the initial margin in an emergency without losing your shirt. Example - trade 1 lot for every $5k you have in the brokerage house and $10k in other assets. If you have a liquid net worth of $450k, you could trade 30 lots with $150k at the broker and $300k in liquid assets elsewhere. This should keep you out of the poorhouse. (although you are still leveraged almost 4:1)
Just to take this thread in a new direction....what do you think would be the greatest catalyst for a surprise meteoric rise in the DOW? I'm thinking it would be either some medical breakthrough (cure for cancer or some more generic discovery that could cure anything) or some new source of clean unlimited energy (e.g. cold fusion)....problem is that everyone would be skeptical at first so I can't see the rise happening all at once. I'm having trouble of thinking of any news so great that the dow would rise 50% in one day (barring the case where it fell 50% on the previous day on news that turned out to be not-so-bad)
Collapse of the US Dollar. The Dow stocks are priced in Dollars. So, if the currency collapses... Remember hyperinflationary germany in the 20s, where the price for a loaf of bread rose to several millions or even billions of Marks.
I think the things you mentioned would probably have a large effect, but it would take time for the market to believe they are legit and price them in. I think most people would be skeptical of that news at first. The only major intra-day risk to the upside I see - on the order of +20% - is some type of weimar type hyper-inflation where all nominal prices explode. If, for instance, china dumped all their US debt at once, it might first result in a large gap down in the market, followed by a huge rally as the dollar gets crushed. But with the latter I think a stop would offer some level of protection, as opposed to the former.
that's not really a problem for OP. assuming the hyperinflation continues for some time, he won't have problems settling his $billions of debt to his broker.