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.
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.
Think big, think positive, never show any sign of weakness. Always go for the throat. Buy low, sell high. Fear? That's the other guy's problem. In this building, it's either kill or be killed. You make no friends in the pits and you take no prisoners. One minute you're up half a million in soybeans and the next, boom, your kids don't go to college and they've repossessed your Bentley. Are you with me?
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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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?
@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.