I have to admit that my knowledge for this topic is actually pretty limited, hoping you guys can help me to understand following:
1.) Lets assume my current account equity is 50.000 USD and I decide to go Long on 10 corn contracts.
However, my Broker (IB) will certainly execute the order because margin requirements are met
Intraday Initial Margin 2,363 x 10 --> 23.630 USD Total margin
Intraday Maintenance Margin 1,750
Now, after a couple of hours all of a sudden the market become locked limit
--> daily price limit of 0,40 Cents reached (2000 USD/contract)
Letīs further assume, this will go on for the next 3 days, this would sum up to a total loss of --> 60.000 USD
Can something like this really happen, or is IB fast enough to liquidate positions when maintenance margin is not given anymore, even in a "flash crash" ?
Can I really get into a situation that my accountbalance becomes negative?
IB may auto-liquidate but if they cannot close out your positions in time, your account can go definitely go negative. You'll have to make up the difference and if you cannot, IB can get a judgement against you. Whether they can collect is another matter.
Limits typically are expanded after a day or two (check the rules) so it's rare to be at limit up or down for consecutive days without at least some trading going on. The information flow is much better these days and most markets trade nearly around the clock, but it could still happen. If you have access to long term daily charts, look at corn and soybeans during the summer of 1988.
Trade within your means and have a plan for when things go wrong. That plan may include being familiar enough with options that you can mitigate your futures losses before they cascade into a personal financial disaster.
Last edited by CafeGrande; March 25th, 2014 at 07:57 PM.
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From my personal experience, the clearing firm (ie: IB) will go after you for any negative balances plus interest you may owe. Even though the paperwork and risk disclosure says they may liquidate if your account balance gets to low, your still responsible for all positions.
Some people may say with the near 24hr access to the markets, limit up/down may be limited to a day or so, I can remember a time a few years back where a Firm who's business was mostly in the Cotton futures went belly up and forced to liquidate all positions cause limit down for 4 days in a row. It can still happen today.
According to the CME's website, Corn Daily Price Limit $0.40 per bushel expandable to $0.60 when the market closes at limit bid or limit offer. There shall be no price limits on the current month contract on or after the second business day preceding the first day of the delivery month.
I have seen times where the limits would be met, and expanded in the same day. This happened in Crude about 3 years ago.
Be careful of your position size during the crop reports and always watch out for the weather.
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First of all thanks to everybody for your replies, summarizing it, getting "locked Limit" is a potential thread but if handeld correct it will not wipe you out.
But as mentioned by tigertrader: either way you are going to have to pay up to get out
Ok, if I see this correct there are 2 ways availabe for locked limit situations:
1.) Establish an opposite position in a deferred month to lock in a spread.
This is actually my prefered solution, just need to make sure to enter the "correct" deferred month, e.g for Corn to determine between new and old crops (March,May,July,September --> old crop) from December --> new crop
But from the quotes I will see right right away the correct ones, because those will be substantially up/down
But in case all deferred months are already locked limit as well, I need to go into options.
2.) Creating a synthetic future contract by using call/put options
On this I am actually not so sure how this actually works ..... hoping you guys can help me on that.
This is what I know so far:
A synthetic LONG contract can be created by : BUY a call and SELL put
vice versa, a SHORT contract can be created by: BUY a put and SELL a call
Letīs assume I am SHORT 1 contract in May Corn at 4,50 USD
Lets assume further May Corn made today a 40 Cent Limit UP move and is currently locked at 4,83 USD
I am willing to take the 33 Cent loss, but want to protect myself against further losses
My question is related to the strike price:
Which call/put strike price do you select to protect yourself for above mentioned scenario? --> deep in the money, at the Money, or out of the money?
Below a short listing of May Corn 2014 options, maybe you guys can tell me how you would proceed.
OK, responses are relatively limited However, most likely I was not clear enough....
So, I think the answer to my question regarding the correct Option strike Price when locked Limit is
--> at the Money or in the Money --> just this ensures that any further loss will be as small as possible.
But... Options have lock limits as well that might require to take call/puts that are slightly out of the money.
I found an interesting article regarding this topic when buying Options that are deep in the money and you have the right Broker that you donīt Need to cover the premium of the Options, because itīs a riskfree Investment that will be right away converted in a future contract.
The article mentioned that this is not Support by most of the online Brokers, thatīs the bad part of the Story.