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Help needed on Locked limit
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Help needed on Locked limit

  #1 (permalink)
Trading Apprentice
vienna
 
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Help needed on Locked limit

Hello,

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

Following questions:

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?

Thanks a lot for helping me on that

bye

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  #2 (permalink)
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  #3 (permalink)
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abcplot View Post

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 08:57 PM.
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  #4 (permalink)
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abcplot View Post

Following questions:

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" ?

Something can happen. Don't know if IB would liquidate in time, but what ever happens, it is your dime, not theirs if they do not.


abcplot View Post
Can I really get into a situation that my accountbalance becomes negative?

Yes, and you will be liable for the negative amount.

Math. A gateway drug to reality.
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I would contact my broker

Psychology > Strategy ≥ Money
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  #6 (permalink)
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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.

Good luck.

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2 ways to get out

in 40 years of trading i've never been caught the wrong way in a limit move where i couldn't couldn't get out

you can spread out of the position in a deferred month or spread out of the position in the options market
either way you are going to have to pay up to get out

i remember tom baldwin taking 5000 bonds long into unemployment and watching it lock limit down -that's a $10MM loser - he was still able to spread out of it in the back months

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  #8 (permalink)
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tigertrader View Post
in 40 years of trading i've never been caught the wrong way in a limit move where i couldn't couldn't get out

you can spread out of the position in a deferred month or spread out of the position in the options market
either way you are going to have to pay up to get out

i remember tom baldwin taking 5000 bonds long into unemployment and watching it lock limit down -that's a $10MM loser - he was still able to spread out of it in the back months



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


Following example:

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.

Strike Current Premium
470-0C 24-4 1,225.00
470-0P 10-6 537.50
475-0C 21-1 1,056.25
475-0P 12-7 643.75
480-0C 18-7 943.75
480-0P 14-4 725.00
485-0C 16-5 831.25
485-0P 17-2 862.50
490-0C 14-5 731.25
490-0P 20-4 1,025.00
495-0C 12-2 612.50
495-0P 24-3 1,218.75


Many thanks in advance
abcplot


Last edited by abcplot; March 26th, 2014 at 06:53 PM.
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  #9 (permalink)
Trading Apprentice
vienna
 
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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.


Trading Lock Limit Markets with Options | Daniels Trading

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  #10 (permalink)
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abcplot View Post
But... Options have lock limits as well that might require to take call/puts that are slightly out of the money.

Options do not have lock limits. They still trade even if the futures are locked.

Math. A gateway drug to reality.
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