Online trader begs for help after his short goes south

[cynic]

I accept that you can use options to hedge etc but that's not really a secret.

Quite right no secret to it at all, it's just funny how so many newcomers think that stop orders are the only available tool for risk mitigation.

As many here will probably already know,if a person holds long exposure over the weekend, he/she cannot limit his/her exposure to the level of any stop order (above zero) because the market could potentially gap past it. A long put option on the other hand offers certainty that all exposure between zero and the strike is covered. The main downside to the put is that this certainty comes at the cost of the premium and there are a number of factors that influence the value of that put, however, at least the maximum possible loss can accurately determined once the put has been procured.

Edit: I forgot to mention that depending on the chosen market there are further ways to mitigate risk. Why limit yourself to expensive options or inefficient stop orders?

 

[Modest]

Does anyone have a link to an article about hedging using options. Not that I'd even consider trying it at this point but I am very curious.

Or

How would someone hedge a a long position in the ES? Price only goes up or down.... If you're long ES and you write a option and the ES goes in your favour and your option is written (i think that's short?) aren't you now haemorrhaging $ via the option?

 

[Faramir]

I must be such a noob, not only am I having trouble trying to follow the technical discussions; I have no idea why some people is upset with each other. It must be the heatwave.

At least I have no personality. It is nothing. Therefore no one can clash my personality because it is nothing and non existent. Clashes can only occur if there is something to clash with?

All is forgiven and everyone please return. There must be lots of people who appreciate your contributions. Please?

 

[Valued]

Does anyone have a link to an article about hedging using options. Not that I'd even consider trying it at this point but I am very curious.

Or

How would someone hedge a a long position in the ES? Price only goes up or down.... If you're long ES and you write a option and the ES goes in your favour and your option is written (i think that's short?) aren't you now haemorrhaging $ via the option?

Buying a put option costs money but it allows you to sell at a certain price in the future. I am no options expert and it's been a while since I have looked at it and the pricing and how they work is complex and I don't pretend to know the maths in terms of working out pricing. However, say you have an instrument that is worth $1 per point and it's currently at 1000 and you buy in at the 1000 level. You could buy a put option, which is a right (but not an obligation) to sell, at 800 at some point in the future. Because you are buying a right to sell at 800 this is called an out of the money option. No one would sell at 800 since they could sell for 1000 right now. If the price drops to 801 at the date of the expiration of the option your option is completely worthless since no one will sell at 800 if they can get 801. However, if the market drops to 500 you have the right to sell what you previously bought at 800 and the person on the other hand has the obligation to buy at 800. Now you have lost 200 points but you could have lost 500. You did not. What happens though is that options get priced differently. 500 would be very out of the money. An option to sell at 900 would be more expensive. You pay the premium on the option price, so it doesn't represent the full value which means you can still profit but your profit is going to be reduced by the premium you had to pay for the option.

 

[Modest]

Buying a put option costs money but it allows you to sell at a certain price in the future. I am no options expert and it's been a while since I have looked at it and the pricing and how they work is complex and I don't pretend to know the maths in terms of working out pricing. However, say you have an instrument that is worth $1 per point and it's currently at 1000 and you buy in at the 1000 level. You could buy a put option, which is a right (but not an obligation) to sell, at 800 at some point in the future. Because you are buying a right to sell at 800 this is called an out of the money option. No one would sell at 800 since they could sell for 1000 right now. If the price drops to 801 at the date of the expiration of the option your option is completely worthless since no one will sell at 800 if they can get 801. However, if the market drops to 500 you have the right to sell what you previously bought at 800 and the person on the other hand has the obligation to buy at 800. Now you have lost 200 points but you could have lost 500. You did not. What happens though is that options get priced differently. 500 would be very out of the money. An option to sell at 900 would be more expensive. You pay the premium on the option price, so it doesn't represent the full value which means you can still profit but your profit is going to be reduced by the premium you had to pay for the option.

Hmm interesting no doubt....Thanks Valued I appreciate you dumbing it down for me, it makes a much more sense now.

 

[cynic]

Does anyone have a link to an article about hedging using options. Not that I'd even consider trying it at this point but I am very curious.

Or

How would someone hedge a a long position in the ES? Price only goes up or down.... If you're long ES and you write a option and the ES goes in your favour and your option is written (i think that's short?) aren't you now haemorrhaging $ via the option?

Buying a put would hedge long exposure below the strike level.

Writing a call would only benefit to the tune of the premium whilst capping the profit potential of the long, so there would still be significant downside risk on the long position.

 

[Valued]

A GSL is probably cheaper than hedging with options though. I know that is a huge can of worms and it depends on minimum stop distances, and maybe it's not true for some high risk stops. However, I think it's true most of the time, at least for indices and blue chips.

Cynic is going to be a cynic though and say that the OTC provider will hit your stop deliberately by marking up their price. Maybe, maybe not. That's just another can of worms.

 

[skc]

I am very afraid of shorts. I am too uneducated: working out when a stock will fall and thus take out a short. When does someone know their limits or where their limits of understanding of trading?

Trying to following this thread, it only confirms that I don't even know what I do not know. Did Joe pick the wrong stock? Was it bad timing because some unexpected fantastic news made it rocket up?

Is this "mistake" very easy to repeat? Should I leverage a short or two on some random stock and see if I can beat his losses? Has anyone experienced a "Short Squeeze"? Rather than tell me what is a short squeeze, please tell me the emotions you were feeling as you scrambled to cover your positions. Joe Campbell didn't even get a chance I think.

A few key points to note about Joe's story (and shorting in general)...

- Shorting in most cases is no different to going long, especially over the short term. Long term one could argue that there's asymmetric risk/reward (i.e. longs can go up >>100% while shorts can at most make 100%)... but a stock that rockets up over 400% overnight is very rare, particularly in any stock of meaningful size.
- The stock in question, KBIO, is a tiny tiny company. Market cap is ~$45m AFTER it ran up 400%. Usually these tiny nano-cap stocks are NOT even available for shorting to the common folk. So the chances of you being able to make such mistake is small in Australia.
- The fundamental description of KBIO reads like it's a dying company. So one is not wrong to expect the price to go down. However, with the market cap being a tiny $8m... really how much more downside can you expect?
- Joe had an account value of $33k, yet his position size on the KBIO short appeared to be $18k. That's more than 50% of his account, on one tiny speculative stock. Even if his decision to short the stock is not wrong, his position sizing is definitely wrong.
- If I was shorting this stock with a $33k account... it would at most be $3k. If it rockets up 500%, I lose $15k... not my 401(k).
- So really there's a confluence a factors: being able to short a tiny stock at pretty much the physical limit of how low it could go, totally unlucky to be hit with news from the left field, and having a position size that's 5-6 times bigger than it should. The chance of the same thing happening to you and me are actually pretty low.
- I haven't really experienced a short squeeze, but I have held short positions while a stock announced the receipt of a takeover offer. The damage was ~30-40% gap in the share price, which is not that much different to a nasty profit downgrade while holding long in a stock.

P.S. My research on KBIO is limited to reading this article and the OP's link.
http://www.benzinga.com/general/bio...0-on-penny-stock-days-after-company-said-it-w

P.P.S. Apparently he got $5,310 from his fund raising campaign. I am surprised that he ended it so soon.

You definitely did say you turned a 5 figure gain into a 5 figure loss though so your profits were completely wiped out and then some. I don't think that's important, it was more to indicate your position sizing was too high.

That sounds like my average morning.

I'm out here. Merry X-mass and happy new year everyone.

First we lose the Duck

Now we lose the tribal trading elder

I think TH has just had enough of this particular discourse and ready to take his Xmas break.

 

[Faramir]

Thank you skc. That is a very thorough explanation. Maybe I can say that I have learnt not to be greedy. Joe Campbell risked too much because he was absolutely sure his stock won't rise and he wanted to maximise his potential gain. Well, I'm not him but I am guessing that what he was thinking. Why Joe Campbell risked $33k? Why put so much (in terms of portions/percentage of what he had) into one stock? I wonder if Joe realised how much he was risking? Only those who have made similar mistakes can explain better than me guessing.

Again, thank you skc.

 

[cynic]

A GSL is probably cheaper than hedging with options though. I know that is a huge can of worms and it depends on minimum stop distances, and maybe it's not true for some high risk stops. However, I think it's true most of the time, at least for indices and blue chips.

Cynic is going to be a cynic though and say that the OTC provider will hit your stop deliberately by marking up their price. Maybe, maybe not. That's just another can of worms.

My thousands of trades and years of experience with OTC providers and their products alone is ample justification for my assertion that one's contingent orders do indeed influence the price action. Hence my aversion to any strategy intraday or otherwise that requires the use of stop orders.

 

[skc]

My thousands of trades and years of experience with OTC providers and their products alone is ample justification for my assertion that one's contingent orders do indeed influence the price action. Hence my aversion to any strategy intraday or otherwise that requires the use of stop orders.

If what you are saying is true... it can be done 2 ways.

1. They move the underlying market to get to your stop.
2. They simply move the quoted price specific to your account to get to your stop.

To verify which of the two, may be you can open 2 live accounts, under different names, with the same CFD provider and see if the prices offered to each account is the same at all times, especially when you have an open position with a stop order...

 

[cynic]

If what you are saying is true... it can be done 2 ways.

1. They move the underlying market to get to your stop.
2. They simply move the quoted price specific to your account to get to your stop.

To verify which of the two, may be you can open 2 live accounts, under different names, with the same CFD provider and see if the prices offered to each account is the same at all times, especially when you have an open position with a stop order...

I am aware of a third possibility. They move the price to hit the stop and simultaneously disable trading of the instrument by others. I have observed this happening when my stop was touched and triggered. The price was quoted as indicative at the time and effectively unavailable for trading by myself or others. Promptly thereafter the price returned from whence it came and was suddenly available for trading.

It took a nuclear meltdown in Japan for me to get the opportunity to exit that short position that my devious provider had lumped me with on that occasion!

 

[DeepState]

I have observed that, in periods of market dislocation, the spreads widen a lot as the underlying market makers withdraw. As the spreads widen, your stops get hit even if the underlying really doesn't get that close or even has to trade at those prices (the market makers or OTC provider may inventory the position).

This results in positions being closed despite the mid-price not reaching the stop in the underlying market (if it is even open). The underlying market price can be created by the market maker by reference to the futures market which can also be jumpy in the pre-open. In the most volatile situations, the market makers back off and you can't get a market from the OTC provider.

Perhaps this is what is happening to you.

What it means is that the stop positioning needs to be super-wide. Much wider than you might imagine from looking at the underlying market. For indices, options without stops may be a better alternative for taking long or short positions. These avoid the spread blow-outs. Alternatively, sizing positions that allow for a much wider stop level needs to be considered.

The interposition of an OTC provider between you and the underlying market brings a stack of additional and non-trivial issues. And, when you try to pin them down on what happens in various scenarios like running out of margin and holding positions anyway, or the process of closing positions in such an eventuality you get nothing. All on a "we reserve the right to...blah blah...but offer no guarantees that...blah blah". It is most unsatisfactory.

 

[Craton]

With regards to Joe Campbell in the OP.

Wonder how much I'd be able to raise if I gave out my sob stories...

Whether the story is true or false, I wouldn't give the greedy numb nut a red cent. I may be callous but greed really does have a nasty bite!

Now, even though he may have perceived a low risk/high reward trade, the fact that he was chasing high reward he surely would have been well aware of the hightened risk but, chose to ignore the possibility that the trade could go pear shape by not having a stop loss (or other stategy) in place.
Then when it does go all pear shaped, goes and cries to the Crowd Funders oh woe is me. Prft! I have no sympathy.

He was greedy and paid the penalty. Unfortunately it is a sad indictment of the world we live in, far too many live (or gamble/punt) far beyond their means and when it all goes south, oh woe is me. FFS! Grow a pair, man up and take responsibility for your money.

No doubt due to the back lash and a smattering of guilt he's pulled the page down, that's something I suppose. Nice little 5k+ pick up from the schmucks though. If I sound harsh, so be it.

 

[Bill M]

With regards to Joe Campbell in the OP.

Wonder how much I'd be able to raise if I gave out my sob stories...

Whether the story is true or false, I wouldn't give the greedy numb nut a red cent. I may be callous but greed really does have a nasty bite!

Now, even though he may have perceived a low risk/high reward trade, the fact that he was chasing high reward he surely would have been well aware of the hightened risk but, chose to ignore the possibility that the trade could go pear shape by not having a stop loss (or other stategy) in place.
Then when it does go all pear shaped, goes and cries to the Crowd Funders oh woe is me. Prft! I have no sympathy.

He was greedy and paid the penalty. Unfortunately it is a sad indictment of the world we live in, far too many live (or gamble/punt) far beyond their means and when it all goes south, oh woe is me. FFS! Grow a pair, man up and take responsibility for your money.

No doubt due to the back lash and a smattering of guilt he's pulled the page down, that's something I suppose. Nice little 5k+ pick up from the schmucks though. If I sound harsh, so be it.

Nup, not harsh at all, you said it perfectly.

 

[shouldaindex]

How come there are no famous traders?

 

[Valued]

[SUP][/SUP]

How come there are no famous traders?

There are. Individuals though who trade in high volumes typically become hedge fund managers or work for institutions. There can also be a grey area between trading and investing and some people do a little of both.

The most famous trader of all is probably Jesse Livermore. He was usually right but had notoriously bad risk management. I guess he traded before that was really a thing! He was referred to as "the boy plunger".

George Soros is a famous trader still alive. He does do a lot of investing and is a hedge fund manager. In 1992 he shorted the GBP and made 1 billion dollars and has since been referred to as "The man who broke the bank of England".

Other famous traders that come to mind are Richard Wyckoff and William Gann. Wyckoff adopted more of a trend following strategy using price and volume. Gann was the inventor of various tools for trading which I suppose can be referred to as "mathematical". He is relatively famous for that, but his methods are questionable at best (and at worst complete rubbish).

The most famous Australian trader is probably Richard Farleigh. He appeared for a short time on Dragon's Den in the UK. He is part investor and part trader. He believes in trend following and entering and exiting at the right time, he does not believe in the Warren Buffet style of buy and hold, but also he has no issues being involved in a trend for years on end if he thinks the fundamentals are still there.

 

[CanOz]

How come there are no famous traders?

Paul Tudor Jones, William Eckhardt, Larry Williams, dozens and dozens in the market wizard series....highly recommend you read those, especially the latest 'Hedge fund market Wizards'

 

[Modest]

I watched the Paul Tudor Jones documentary and that guy seems like the biggest gambler - haha putting on his lucky basketball shoes before placing a huge trade haha

 

[CanOz]

Famous Traders List