Disaster Planning

T

TheBramble

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Thread started at a suggestion from Salty Gibbon from a thread discussing general risk/exposure.

I'd like to kick this thread off by asking Mr. Charts a couple of things he alluded to on the other thread and posing a general question to all t2w members.
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Mr. Charts said:
Catastrophe event planning, e.g. terrorist attack, needs to be considered and there are easy "insurance" choices such as long deep OTM puts.
Click to expand...
By this Richard I take it you're buying PUTS rather than selling CALLS?

Have you therefore done an analysis to determine if the accumulation of regular income from premium derived from worthless expiration of sold CALLS is less than 'insurance cover' that bought PUTS would provide? The gaps between catastrophic events indicate such an analysis would be worth doing.

PLUS

You say deep OTM puts - are you buying (if you are buying) near or far series? I wonder if you could share your analysis of the best route to take. Continued near month deep OTM (cheaper/more frequent) or once every x months buying the furthest month (more expensive/less frequent?


Mr. Charts said:
I should leave that to our resident options expert, RogerM. Much that is written on BBs is not accurate and is misleading
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I think Gardan was only asking how YOU use deep OTM options as insurance. I hardly think your response would be construed by anyone as "not accurate" or "misleading". Please, fill us all in on how you do this.

Anyone else care to share their 'Disaster Planning' methodologies or approaches???
 
Thanks for kicking off the thread Tony.

I too would be interested to hear about the practicalities of buying out-of-the-money puts as insurance against a catastrophic stock market collapse. In particular exactly what instruments to buy and at what price levels, cost benefit etc., in relation to the typical exposure I would have at any moment in time as a day trader.

"Deep" suggests the premiums would be extremely cheap but how would you ensure that they are not so deep that the collapse happens and the puts still remain out of the money ??

It would be good if somebody could fill us in on this , preferably with some worked examples.
 
I'm not convinced that an intraday trader who never holds overnight has too much to worry about from a catastrophe, as long as (s)he always has a native stop in the market.

Of course not all exchanges support native stops and this could be a problem. For instance, on ECBOT which is used by mini Dow traders, stops must be simulated by the broker and this could certainly be dangerous as if the broker's system went down and failed to transmit the stop order a loss could be huge. I wonder if they'd be liable for it in this case - probably not? I must look into it.

I remember holding a large long position in Marconi as the first twin tower was struck and my stop was hit a good few seconds later, with no slippage, no gap, not a penny more lost than I would have done anyway. In fact there would have been time to exit similarly with a market order. Perhaps this was unusual, I don't know, but surely news cannot travel so instantaneously that there isn't a single bid left at least somewhere near one's stop?

Nevertheless, as a mini Dow trader,and thus without a watertight stop, I'd be very interested to hear more about a simple protective options strategy, or indeed why I am wrong about any of the above.
 
Salty Gibbon said:
Thanks for kicking off the thread Tony.

I too would be interested to hear about the practicalities of buying out-of-the-money puts as insurance against a catastrophic stock market collapse. In particular exactly what instruments to buy and at what price levels, cost benefit etc., in relation to the typical exposure I would have at any moment in time as a day trader.

"Deep" suggests the premiums would be extremely cheap but how would you ensure that they are not so deep that the collapse happens and the puts still remain out of the money ??

It would be good if somebody could fill us in on this , preferably with some worked examples.
Click to expand...

Well said Salty, me too!
 
TheBramble said:
Thread started at a suggestion from Salty Gibbon from a thread discussing general risk/exposure.



Anyone else care to share their 'Disaster Planning' methodologies or approaches???
Click to expand...

What's your thoughts on designing your trading system around having roughly equal long & short trades in the market at the same time? Or if you like just going long at least have 1 maybe 2 shorts, when you are trading, for a comfy blanket.

By shorts I mean selling type and not the medicinal type, which would probably also work if something bad happened. I like Tea personally.

Gary
 
Frugi

It may only be a terminology thing but could you please explain what a Native Stop is.
 
I'm not convinced that an intraday trader who never holds overnight has too much to worry about from a catastrophe, as long as (s)he always has a native stop in the market.
Click to expand...

Maybe the greater danger lies with a stock suddenly being suspended and pulled out of the market for a couple of hours and then coming back in US$ 10 lower.

Is there a way of getting advance warning of imminent stock suspensions ?
 
Salty Gibbon said:
Is there a way of getting advance warning of imminent stock suspensions ?
Click to expand...

Monitoring Directors BUYs and SELLs in their own company ??

( eg Martha Stewart, and that M&S chappie sold with good timing when Mr Green was after M&S )
 
Salty,

A native stop is one held at the exchange. A simulated stop is held by the broker and then transmitted, usually as a market or limit order, when triggered. Native stops will be triggered even if the IB servers go down because they're already in the exchange order book. An example of a native stop is a stop-limit order on Globex. Not many exchanges seem to support native stops unfortunately.

Native orders also tend to be filled faster than simulated ones because they're already ahead of them in the 'queue' and there is a slight time delay while IB converts a simulated stop into a market order and then transmits it.

I don't trade US stocks but as far as I can see from IB's website stop orders are not native on AMEX, ARCA, BTRADE, BRUT, INET, NASDAQ SuperSoes/Montage or NYSE but Bramble, T333 or Mr Charts may know better.

Sudden stock suspension is a risk and one of the reasons I no longer trade them. I'm sorry I can't help you there.

I hope IB have failsafes like UPS and mirror servers or a lot of our orders could fail to be sent to the exchange in the event of a power outage.
 
Trading halts appear to be more common than trading suspensions.

Look at histories of both here :-

http://www.sec.gov/litigation/suspensions.shtml

http://nasdaqtrader.com/asp/TradeHaltHistIndex.asp


Would anyone like to put odds of being caught up in one of these over a 10 year day-trading period where you are in and out of trades during the day ( trading in Nasdaq 100 stocks only )and never carry overnight positions ?

Odds of 2-1, 3-1, 5-1, 10-1, 100-1 ...........??


Anybody got any thoughts on this ?
 
Last edited:
Good idea for a thread Mr Bramble.

Furgi said "I'm not convinced that an intraday trader who never holds overnight has too much to worry about from a catastrophe, as long as (s)he always has a native stop in the market."

This statement assumes all catastrophe's happen overnight. Should we not ask what will happen to ones risk control is the market ceases to trade for what ever reason when it's open (and I'm assuming any stops can't be activated). 9/11 occured when main US market were closed. I assume they would have had to have closed if they were open and would have then re-openned over 7% down a week later.
 
Disaster Planning:

Hospitalisation: What if you can't close your positions down. Can someone else and do they know how to? (or even sudden death; are your dependents going to know what to do re your positions).

Fire at your trading station: Off site or fireproof storage of key documents/PC files/contacts/postitions etc.

Ditto flooding, power outage etc.
 
I didn't mean catastrophes only happen overnight, Tuffty.

I was assuming, very possibly wrongly, that the market cannot be halted/closed, or lose all its bids and offers, in so short a time that one couldn't exit first. We are talking a few seconds here at most.

For instance, the FTSE reaction to 9/11 was much slower than I would have imagined it to be given the gravity of the situation.

I'm trying to find an intraday FTSE or Dax chart of the day but haven't managed to yet.

The other hazards you mention are good reasons, imho, to always have a stop in place. My worry is not that the market I trade will close or fall millions of points before it is filled, but that the stop will never reach the market because of a failure by my broker.
 
frugi, But you are assuming you'll be able to get out. Depending on the disaster you may not! I don't know enough about the various exchanges disaster planning to fully understand what assumptions are correct or not.
 
I admit I am making a foolhardy assumption.

A direct attack on the exchange's infrastructure that somehow instantaneously erases all resting orders in the market and prohibits any further trades taking place, for example, would certainly be deeply unpleasant.Now I think about it, the same could happen to any account where one held money. Nasty.
 
Frugi, The S&P Futures on 9/11 were around 1102 falling to 1095 after the first plane strike then falling to 1070 after the second after which they stabilised at around 1075 to 1080.

If one was not able to get out the spread betters would still hopefully be up and running and one may be able to hedge. I'm not sure if they continued a 'grey' market in US indecies on/after 9/11.
 
Good points all.

I must admit, I was only thinking of a 'major' disaster - not a 'local' one (PC outage, ISP failure etc.). Great Tuffty, something else to worry about!

I have redundancy across all my kit and any one PC can handle one (or all ) of the others' workload.

I don't have ISP BB outage cover - which is crazy really - I'll look into a backup/alternative. Thanks Tuffty.

I have two on-line brokers so if one platform goes down and things get 'serious' I could hedge with the other.

I have direct phone line contact for both brokers.

I think that covers local and broker outage.

As for serious disasters (and although we all use "9/11" as an unexpected, sudden and negative impact on the markets - just take a look at the trend at that time and levels hit since) of worldwide dimension or significance, does anyone use any insurance - I mean REAL insurance company insurance? Can we get cover for this type of situation?

Mr. Charts mentions deep OTM PUTS (but seems unwilling to disclose his approach on these boards - which is a shame) and others have mentioned a pair trading approach.

Fot my part (as mentioned in the spawning thread) I work on a basis of having no more than 10% of my liquid assets in the market at any one time.

That way - if I get hit - and totally hit - I still can get back it at only slightly reduced levels on recommencing trading activities.

Taking a hypothetical $1M assets position and using 10% you end up with active trading capital of $100K. Lose it all in a catastrophic event (total loss being extremely unlikely in reality) and you get to start again with $90K active trading capital. For me, psychologically - no problem.

For someone working on a 50% basis - they go from $100K to $50K - i.e. half the size they were previously trading. It may be that because I've suffered this a few times that I'm so clear about not wanting it to happen again.

(It has to be said, all of my '9/11's were of my own making - on a day basis and even in one instance on just one trade!!!).

What level of exposure do other traders assume?

If we work with a definition of liquid assets as - cash, and other assets that can quickly be converted to cash - what percentage of this aspect of your finances are you willing to expose through your trading activities?

(My personal sub-definition of liquid assets convertibility is something that I can turn into cash by phone or fax or email within 24 hours) - excludes jewellery, precious metals [physical], antiques, art etc.)

This of course does not include property or any other 'hard' investments from which you derive capital growth or income.

As mentioned before, I personally will utilise just 10% in trading. The other 90% are in relatively low-return and very low-risk holdings, but with rapid access.

On what basis would you consider increasing the percentage committed to trading?
 
TheBramble said:
Good points all.

I must admit, I was only thinking of a 'major' disaster - not a 'local' one (PC outage, ISP failure etc.). Great Tuffty, something else to worry about!

I have redundancy across all my kit and any one PC can handle one (or all ) of the others' workload.

I don't have ISP BB outage cover - which is crazy really - I'll look into a backup/alternative. Thanks Tuffty.

I have two on-line brokers so if one platform goes down and things get 'serious' I could hedge with the other.

I have direct phone line contact for both brokers.

I think that covers local and broker outage.

As for serious disasters (and although we all use "9/11" as an unexpected, sudden and negative impact on the markets - just take a look at the trend at that time and levels hit since) of worldwide dimension or significance, does anyone use any insurance - I mean REAL insurance company insurance? Can we get cover for this type of situation?

Mr. Charts mentions deep OTM PUTS (but seems unwilling to disclose his approach on these boards - which is a shame) and others have mentioned a pair trading approach.

Fot my part (as mentioned in the spawning thread) I work on a basis of having no more than 10% of my liquid assets in the market at any one time.

That way - if I get hit - and totally hit - I still can get back it at only slightly reduced levels on recommencing trading activities.

Taking a hypothetical $1M assets position and using 10% you end up with active trading capital of $100K. Lose it all in a catastrophic event (total loss being extremely unlikely in reality) and you get to start again with $90K active trading capital. For me, psychologically - no problem.

For someone working on a 50% basis - they go from $100K to $50K - i.e. half the size they were previously trading. It may be that because I've suffered this a few times that I'm so clear about not wanting it to happen again.

(It has to be said, all of my '9/11's were of my own making - on a day basis and even in one instance on just one trade!!!).

What level of exposure do other traders assume?

If we work with a definition of liquid assets as - cash, and other assets that can quickly be converted to cash - what percentage of this aspect of your finances are you willing to expose through your trading activities?

(My personal sub-definition of liquid assets convertibility is something that I can turn into cash by phone or fax or email within 24 hours) - excludes jewellery, precious metals [physical], antiques, art etc.)

This of course does not include property or any other 'hard' investments from which you derive capital growth or income.

As mentioned before, I personally will utilise just 10% in trading. The other 90% are in relatively low-return and very low-risk holdings, but with rapid access.

On what basis would you consider increasing the percentage committed to trading?
Click to expand...

Tony/Chaps I can not recall the article precisely, I think it was in the Sunday times. It was an interview with a top Oxbridge Professor who educated the " Next Captain's in Industry"

He was asked what would happen to the chaps who flunked there final year and dropped out of the course. His Answer (loosely, it was a few years ago) " They would probably end up Interviewing the chaps who finished the course"

By mentioning this I am not advocating a total gung ho attitude, I would just like us not to be so restricted to what is a very risky business, that we become so aware of every total risk including West Brom winning the Premiership, that it would stiffle the Entrepreneurial Spirit that drives great people forward.

Someone mentioned once un-learning, IMHO there might be something to this.
The Purest might call it luck, driving around in there Volvos.

Truth is Entrepreneur's do take chances and do succeed.

Risk management, Yes 100% but lets not kill our flare and ingenuity
 
Re the other thread

Brumbles, Re my post 56 on the other thread, you may of missed it because it had reference to yourself and a.n other. It was an important question for me, so if you get a mo?????

Thanks in advance Tony
 
Mr Bramble asked "What level of exposure do other traders assume?"

One where if a catastrophe/disaster should hit any position (or positions if they are correlated) it would not alter my life-style.
 
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