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Limit Up Limit Down Question
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Limit Up Limit Down Question

  #11 (permalink)
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An example


mwtzzz View Post
Or buy OTM options at the beginning of the month before you begin your trading and hold them through expiration and look at it as simply the cost of doing business.

I've seen you mention this several times, would you be willing to walk us through the mechanics of this sort of trade setup. In general I follow you but it would be helpful to see it spelled out.

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  #12 (permalink)
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empty View Post
I've seen you mention this several times, would you be willing to walk us through the mechanics of this sort of trade setup. In general I follow you but it would be helpful to see it spelled out.

Of course. It's not really a trade, though, it's a buy-and-hold options to expiration.

Middle of the month is when CL options expire. So when that time comes, buy 1 put and 1 call of the next month, for every futures contract (lot size) you normally trade as part of your strategy. For example if you always trade in lots of 2, then buy 2 puts and 2 calls.

These are to protect yourself against limit moves. To determine the strike prices for the options, figure out how much you can withstand losing without threatening your ability to continue trading. You may determine this is $5000/contract. Let's say oil is at $93, so it would mean $87 and $98. You would buy an $87 put and a $98 call. In CL a limit move is $10, so this effectively limits the damage to about half the limit move.

You hold the options through the entire month and let them expire. It is an out-of-the-pocket expense: an insurance policy against something that happens very rarely, but when it does happen it can be devastating.

Folks who consider this a waste of money might want to look at how Nassim Taleb became rich. Taleb is the famous author of "Fooled by Randomness" and he became rich by spending money every month on options that never paid off, until that once-in-a-blue moon occurrence when they paid off so handsomely as to make all those monthly "expenses" trivial.

you might want to follow my other thread where I will talk about how to use options as part of a futures trading strategy, not just as protection against limit moves: https://futures.io/commodities-futures-trading/26073-put-thinking-caps.html

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  #13 (permalink)
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Thank you!



mwtzzz View Post
Of course. It's not really a trade, though, it's a buy-and-hold options to expiration.

Middle of the month is when CL options expire. So when that time comes, buy 1 put and 1 call of the next month, for every futures contract (lot size) you normally trade as part of your strategy. For example if you always trade in lots of 2, then buy 2 puts and 2 calls.

you might want to follow my other thread where I will talk about how to use options as part of a futures trading strategy, not just as protection against limit moves: https://futures.io/commodities-futures-trading/26073-put-thinking-caps.html

Thank you so much for this info. It's very helpful. I had it wrong so I appreciate that you took the time to spell it out. I was not aware of your other thread so I will go read it and learn.

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  #14 (permalink)
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empty View Post
Thank you so much for this info. It's very helpful. I had it wrong so I appreciate that you took the time to spell it out. I was not aware of your other thread so I will go read it and learn.

You're welcome. One should primarily view options as insurance - when you buy an option you are buying insurance, when you sell it (short) you are selling insurance.

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  #15 (permalink)
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Sorry to resurrect this thread, but I'm a little confused -- what's the difference between limit up, and locked limit up? Or are these just two terms for the same thing? Also, it looks like trading still occurs at this price, is that correct? In other words, just because the market is limit up/down doesn't mean trading is halted....my price chart still shows contracts are being traded, just at the locked price. However on 9/18/12 when corn went lock limit up, it looks like trading WAS halted early at 8:32 AM PST...but in these other cases, it appears that the market continued to trade until the normal close, just only at the limit price. I'm assuming that means that if you were fortunate enough to be long, you can sell at the limit price, but if you're looking to enter long or short, it can only be at the limit price.

I hope my questions make sense.

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  #16 (permalink)
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LightWeight View Post
Sorry to resurrect this thread, but I'm a little confused -- what's the difference between limit up, and locked limit up? Or are these just two terms for the same thing? Also, it looks like trading still occurs at this price, is that correct? In other words, just because the market is limit up/down doesn't mean trading is halted....my price chart still shows contracts are being traded, just at the locked price. However on 9/18/12 when corn went lock limit up, it looks like trading WAS halted early at 8:32 AM PST...but in these other cases, it appears that the market continued to trade until the normal close, just only at the limit price. I'm assuming that means that if you were fortunate enough to be long, you can sell at the limit price, but if you're looking to enter long or short, it can only be at the limit price.

I hope my questions make sense.


Difference between limit up and locked limit up

Let us assume that there is a USDA report which announces lower than expected end-of-season stocks for corn. The report immediately drives prices up to the limit price. Trading above that price is prohibited.

When this happens, there are essentially two scenarios

(1) Holders of long positions take advantage of the new situation and close their positions at a profit. New shorts might also enter the market. In this case old shorts will be able to exit their positions near the limit price. The market then closes below the limit price. This situation is called "the market was limit up".

(2) However, if the news has a fundamental impact on the market, corn will move up to the limti price, and the imbalance between buyers and sellers will continue at the limit price. There will be no sellers at the limit, as holders of existing long positions still esteem that market prices are too low. Also no one will open a new short position, as prices are due to rise the next day. The total absence of sellers makes it impossible to buy or to exit an existing short position. The market remains locked at the limit price, with now - or only a few - trades taking place. The market then closes at the limit price. This situation is called "the market was locked limit up".


"Limit up" is an imbalance created by the absence of sellers

When the market is "limit up", you can always sell at that price. You will find a crowd of happy buyers. But you cannot buy any contracts, as no one is willing to sell at or below the limit price, as it is below what is seen as fair value by the market players.

The "lock limit up" may continue for several days, making it impossible for shorts to liquidate their positions. This situtation is quite rare, but nevertheless pretty frightening.

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  #17 (permalink)
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Guys a good thread. @Fat Tails @mwtzzz Would like to get some insights on what your take is...or anyone trading flow...what do you think?

a) Are there ways to figure it is a Limit Up or Limit down when price moves. I suppose this is happening on a everyday basis.

b) Do you consider.... a limit Up or Limit down taken by the big boyz when you enter a trade? to be on the right side

Will be great to hear what you have to say.

thnx
paps

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  #18 (permalink)
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Very interesting thread, following questions:

I am trading commodities EOD and I am not able to monitor the markets at all times.
So far I was just lucky and never got locked limited...... but in case I will, I plan to open asap an opposite position in one of the backmonth to lock in a spread.

My Problem is following: CME does not provide an notifications when a market becomes locked limited, same for my Broker (IB)

Does anybody know a service that provides alerts via email or text message I can subscribe?

Thanks for let me know

bye

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  #19 (permalink)
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Actually CME Group website does provide the daily lock limits for each product traded. Like for crude for instance I believe is 5% each way of opening price.

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  #20 (permalink)
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dungpa View Post
Actually CME Group website does provide the daily lock limits for each product traded. Like for crude for instance I believe is 5% each way of opening price.

@dungpa: Not exactly. The daily price fluctuations are measured against the prior day's settlement price, not against the opening price. For crude oil there is a maximum daily price fluctuation of $ 10. Relative to current market prices of about $ 100, this would be equivalent to a 10% move. If the maximum daily price fluctuation is attained, trading in crude oil and associated products will be halted for 5 minutes. As far as I know there will be no locked limit up or locked limit down situation.

Example: On Friday CL 05-13 settled at 101.14. Trading would be halted on Monday for 5 minutes, if a price level of 111.14 or 91.14 is reached.

I have never heard of a locked limit up or locked limit down situation in crude oil. This is really a subject that affects agriculturals and (occasionally) index futures.

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