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Painful Lessons Learned

Site Administrator | September 24, 2011

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These past few weeks in the market have been anything but normal.  As news and rumors of news continue to occur, the swings up and down are occurring faster and faster.  We have been very adamant that now is a time to reduce risk, consider cutting contract size and always check and double check platforms at the end of the day to make sure no working orders are left hanging.  From a personal trading standpoint, the month of August was the best month of trading I had all year.  It seemed like no matter what market I was in, I could not have been more right and could not have traded any better.  That consistency in my trading even swung into the beginning of September until the Labor Day holiday.

Many times, traders will share with you their success stories but very seldom will they go into detail about areas where they failed and share from the darker side of trading (the losing side).  Over the past three weeks, there have been three bad trades that I have made and I thought it would be helpful to go through each one of them and share what was learned. As a swing trader that has made only three to four swing trades since Labor Day, that tells you that September has been a month I would like to forget.  The markets traded are the Swiss Franc, the E-Mini SP Futures and the 30 Year Bond Futures.   I will cover these in a three part series with the first trade and lessons listed below.  My hope is that the lessons I learned could be helpful to you as well.

Bad Trade #1:  The Swiss Franc:

I went into Labor Day with bullish positions on the Australian Dollar, Canadian Dollar and Swiss Franc futures using futures options.  If polled at the time I would have told you my worry as far as each one goes would have been in order of most vulnerable: CAD, AUD and then finally the good ole Swissy.  Unfortunately, it was the Swiss that made the move against me.  Having a bullish outlook on the Swiss Franc over the coming weeks, I went into the weekend with a short put position at the 1.20 area.  The Swiss Franc at the time was trading around 1.28-1.30 which means I will about 5% out of the money with only 4 days to go until expiration.  The thought process on the trade was that barring a major drop the premium would expire worthless and if a drop occurred, I would take the Swiss Franc long at a price of 1.200.  What I did not count on was the fact that the Swiss Government would intervene and peg the Franc to a certain price against the Euro (an action that had not been taken in over 30 years... yes that is three decades).

After waking up early on the morning of September 6th, I checked my trading platform.  The first thing I noticed was my NLV (Net Liquidity Value).  My immediate thought was, "that can't be right”  (just a general rule in trading if you see the NLV and think, why is that number showing, there is typically an issue at hand).

Contract Info:  One Swiss Franc futures contract represents 125,000 Francs.  With a minimum tick of .0001, that is $12.50 per tick and $1250 per penny movement.

Example: a move from 1.20 to 1.21 is a $1250 move.

One issue with being stuck in an option position during extreme volatility is that liquidity can dry up which makes it very difficult to exit.  At $1250 per penny this issue was getting worse and worse by the tick (at the time I realized it the Frank was down about 4 cents from my strike price).  My initial reaction was to ask myself “What is the Prudent thing to do?”  The emotional side of me began looking for support or an area where it would bounce or possibly reverse.  The analytical side said that the landscape of the trade has changed and it was best to find a way out and take a loss.  I ended up paying up on the premium and exiting the call for a large loss of about .04 (basically it was like I went long at 1.20 and got out around1.16). Looking back this was the best decision I made in the whole trade as the Franc continued to drop and the eventual loss had I held to expiration would have been around double the amount I ended up taking.  That being said here are some lessons learned:

1.)    Cover premium that is essentially worthless.  Before the large drop the premium on the contract I shorted had essentially evaporated and had less than $100 left on it.  Had I simply paid up and exited the trade, the profit would have been booked and the disaster could have been avoided.  Many times we will look and say “I should have just let it expire worthless” however, I took a trade, it worked out initially and by letting it hang around, I left myself susceptible to the risk.

2.)    Consider spreading the contract by buying a lower priced put or even using a calendar spread to help hedge with just a few days to expiration.  This again would have been cheap insurance to buy (pre-event of course).

3.)    Even though I was out of the money, my position had no protection if a large move occurred from a news spike or while I was not in front of the screen.  I could have simply worked a GTC stop for a “worst case scenario”.  Had I worked a stop around the 1.18 area, that would have taken me short the underlying which would have hedged the short put position making me essentially flat with a loss of roughly .02.  The danger with this is that it can whipsaw back up but an order like this would help reduce further downside risk on the trade.

4.)    I have not traded the Swiss Franc since.  I knew the government announcement was a game changer and that I should step away and wait for the dust to settle before coming back to that market.  Too many times traders try to rush in to get their money back and it typically results in even larger losses.  I think it is important to let the dust settle (along with your emotions) after taking a big loss on a trade instead of rushing right back into the same market.  Attn: Switzerland – I will be back!

 

 Cheers,

The TradingPub
“Trade, Talk, Learn- Cheers to Success”

Disclaimer: Article intended for traders and not English majors. Disregard any misplaced commas.

TweetThese past few weeks in the market have been anything but normal.  As news and rumors of news continue to occur, the swings up and down are occurring faster and faster.  We have been very adamant that now is a time to reduce risk, consider cutting contract size and always check and double check platforms at the end of the day to make sure no working orders are left hanging.  From a personal trading standpoint, the month of August was the best month of trading I had all year.  It seemed like no matter what market I was in, I could not have been more right and could not have traded any better.  That consistency in my trading even swung into the beginning of September until the Labor Day holiday.

Many times, traders will share with you their success stories but very seldom will they go into detail about areas where they failed and share from the darker side of trading (the losing side).  Over the past three weeks, there have been three bad trades that I have made and I thought it would be helpful to go through each one of them and share what was learned. As a swing trader that has made only three to four swing trades since Labor Day, that tells you that September has been a month I would like to forget.  The markets traded are the Swiss Franc, the E-Mini SP Futures and the 30 Year Bond Futures.   I will cover these in a three part series with the first trade and lessons listed below.  My hope is that the lessons I learned could be helpful to you as well.

Bad Trade #1:  The Swiss Franc:

I went into Labor Day with bullish positions on the Australian Dollar, Canadian Dollar and Swiss Franc futures using futures options.  If polled at the time I would have told you my worry as far as each one goes would have been in order of most vulnerable: CAD, AUD and then finally the good ole Swissy.  Unfortunately, it was the Swiss that made the move against me.  Having a bullish outlook on the Swiss Franc over the coming weeks, I went into the weekend with a short put position at the 1.20 area.  The Swiss Franc at the time was trading around 1.28-1.30 which means I will about 5% out of the money with only 4 days to go until expiration.  The thought process on the trade was that barring a major drop the premium would expire worthless and if a drop occurred, I would take the Swiss Franc long at a price of 1.200.  What I did not count on was the fact that the Swiss Government would intervene and peg the Franc to a certain price against the Euro (an action that had not been taken in over 30 years... yes that is three decades).

After waking up early on the morning of September 6th, I checked my trading platform.  The first thing I noticed was my NLV (Net Liquidity Value).  My immediate thought was, "that can't be right”  (just a general rule in trading if you see the NLV and think, why is that number showing, there is typically an issue at hand).

Contract Info:  One Swiss Franc futures contract represents 125,000 Francs.  With a minimum tick of .0001, that is $12.50 per tick and $1250 per penny movement.

Example: a move from 1.20 to 1.21 is a $1250 move.

One issue with being stuck in an option position during extreme volatility is that liquidity can dry up which makes it very difficult to exit.  At $1250 per penny this issue was getting worse and worse by the tick (at the time I realized it the Frank was down about 4 cents from my strike price).  My initial reaction was to ask myself “What is the Prudent thing to do?”  The emotional side of me began looking for support or an area where it would bounce or possibly reverse.  The analytical side said that the landscape of the trade has changed and it was best to find a way out and take a loss.  I ended up paying up on the premium and exiting the call for a large loss of about .04 (basically it was like I went long at 1.20 and got out around1.16). Looking back this was the best decision I made in the whole trade as the Franc continued to drop and the eventual loss had I held to expiration would have been around double the amount I ended up taking.  That being said here are some lessons learned:

1.)    Cover premium that is essentially worthless.  Before the large drop the premium on the contract I shorted had essentially evaporated and had less than $100 left on it.  Had I simply paid up and exited the trade, the profit would have been booked and the disaster could have been avoided.  Many times we will look and say “I should have just let it expire worthless” however, I took a trade, it worked out initially and by letting it hang around, I left myself susceptible to the risk.

2.)    Consider spreading the contract by buying a lower priced put or even using a calendar spread to help hedge with just a few days to expiration.  This again would have been cheap insurance to buy (pre-event of course).

3.)    Even though I was out of the money, my position had no protection if a large move occurred from a news spike or while I was not in front of the screen.  I could have simply worked a GTC stop for a “worst case scenario”.  Had I worked a stop around the 1.18 area, that would have taken me short the underlying which would have hedged the short put position making me essentially flat with a loss of roughly .02.  The danger with this is that it can whipsaw back up but an order like this would help reduce further downside risk on the trade.

4.)    I have not traded the Swiss Franc since.  I knew the government announcement was a game changer and that I should step away and wait for the dust to settle before coming back to that market.  Too many times traders try to rush in to get their money back and it typically results in even larger losses.  I think it is important to let the dust settle (along with your emotions) after taking a big loss on a trade instead of rushing right back into the same market.  Attn: Switzerland – I will be back!

We have a very special guest joining us this Monday at 4:30 pm et (New York) who will be sharing some of their insights.  I highly recommend you taking the time to join by clicking the following link: Learn Insights from FuturesTrader71

 Cheers,

The TradingPub
“Trade, Talk, Learn- Cheers to Success”

Disclaimer: Article intended for traders and not English majors. Disregard any misplaced commas.

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