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The only disaster insurance for a long position is a put and the only
disaster insurance for a short position is a call. Stops can get run and
limits simply drive out the liquidity while preserving greater losses
i.e. a limit move through your stop will not get you out at your stop,
in fact you may be unable to get out for several days. Your risk is the
difference between your entry price and the strike.
Earl
----- Original Message -----
From: "Gary Fritz" <fritz@xxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Thursday, January 27, 2000 1:46 PM
Subject: [RT] Overnight disaster insurance?
> I have a really basic position-management question...
>
> How well do overnight stops *really* work to prevent disaster?
>
> I'm primarily interested in the SP and ND. I trade my (mechanical)
> systems with fairly high leverage. I've studied the systems'
> characteristics very closely, and I'm comfortable with my degree of
> risk for normal situations. My aggressive leverage point is still
> only about 1/5 the "optimal f" value for the systems, which is pretty
> darn safe.
>
> However, the systems holds overnight. Since I use only RTH bars, the
> systems essentially ignores nighttime market action. In normal
> market conditions that works just fine, and I'm happy with it.
>
> But I'm concerned about what could happen in a meltdown scenario.
> I'm not too terribly worried about a meltUP, but an overnight crash
> could ruin me. The "old and wise" traders always say that young
> traders get over-confident and trade too large, which works just fine
> until one of those 4-sigma events happens, and then they're bankrupt.
> I want to avoid that.
>
> I've looked at option-protection strategies with no luck. Everything
> I can find says that any option strategy that would protect you from
> an adverse overnight move would effectively erase any overnight
> profits, so you might as well go flat at the end of the day. But
> doing that wrecks my system.
>
> I'm wondering how it would work to place a disaster stop in Globex
> overnight. In particular, how would stops work in the SP or the ND
> in an overnight crash situation? Would all the bids disappear and I
> wouldn't get filled until the bottom (if any)?
>
> Is there any kind of stop or option strategy that can protect you
> against huge losses in an overnight move, without costing so much
> that it eats any overnight profits?
>
> If I can't find a suitable insurance policy, I'll just have to lower
> my leverage. But even then I'm not quite sure how much I should
> allow for to cover a disaster. If China lobbed a nuke on Taiwan, or
> something like that, how much might the markets drop overnight? 100
> S&P points? 300? 500??? If the S&P or ND100 dropped 25% overnight,
> that would represent $80-90k per contract. That's great if you're
> already short, but if you're long...
>
> How can you lower your leverage enough to avoid getting flattened in
> a big crash, without completely trashing your returns in normal
> markets?
>
> Gary
>
>
>
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