Tag Archives | flash crash

Why Trade Options. Part II

Excerpts from an excellent post from Sean (the minimalist trader)

Breaking News: Markets are risky.

Ok, you knew that. You wouldn’t be here if you weren’t already permanently scarred by a bad beat at least once in your career.

Today, a new element of risk has been introduced via market structure. The May 6th flash crash was the first headline advertisement for what surely has become a topic on every active traders’ mind. Stories proliferated around that time of traders who got blown out on that day, and investors who’s way-out-of-the-money stops were triggered, only to watch their stocks swiftly rebound to a more normal price. And even to this day, it seems at least once a week some random stock has its own mini flash crash as a result of some computer gone haywire or a cascade of triggering stop orders.

Traders and Investors are rightly concerned about this, and some are downright scared. It puts many of us in awkward positions. We all know we should trade with stops firmly in place, but in this new marketplace it seems putting a resting stop order on the books is practically an invitation for some HFT [High Frequency Trading] stop-sniffing algo to hunt it down and force its execution. So do we then just put in mental stops? Seems like a logical jump, but that method is fraught with all kinds of its own headaches: What if I’m not at my desk when the trigger is hit? How do I exit? What if I’m frozen in a panic-stricken trance? It happens. Believe me.

For all these reasons and more, this is why I trade options and why I think options trading should become a bigger part of your trading arsenal.

Options trading has always been a useful tool to express a market opinion.

I utilize them because I can define risk. This is especially important when taking speculative, risky, or news-driven positions. This is simplicity in managing risk. And this is why I like options and feel that options are an essential tool for any Minimalist Trader.

Sean’s fears are very realistic. We’ve seen the system break down, and although I’m more confident than he about it the severity – the next time it happens, there is no way to be certain.

Just one more reason for using options.

Stop orders

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What Other Bloggers are Saying

For anyone interested in becoming a full time trader, this blog post by Charles Kirk (The Kirk Report) offers an excellent insight into the trader's world – pros and cons.  Here's a sampling:

PROS

As an independent trader, I set my goals and I'm in charge of my own
destiny. I don't rely on any other person for how much money I make or
how I make it. Other people's opinions of me are irrelevant to my own
destiny. At the end of the day, bottom line trading results (not office
politics) are all that matters.

It is always interesting and I'm NEVER bored

I can live and trade from just about anywhere in the world.

Trading independently offers level of personal freedom that isn't
present in most jobs.

CONS

You've got to bring your A game to the table each and every day. There
is no sitting in a cubicle playing solitaire, visiting with facebook
friends…

Past success means absolutely nothing. You are only as good as your next
trade

There will be little to no respect or understanding for what you do for a
living. People will assume you're a "day trading gambler."

There's much more

***

Frank Curmudgeon (Bad Money Advice) offers an interesting perspective on the 'flash crash' that occurred two months ago (May 6, 2010).

"Regulators announced investigations.
Pundits theorized. Both houses of Congress held
hearings. And two months later we are no closer to finding the
person or persons who screwed up to cause this."

The exchanges canceled all trades made between 2:40 and 3:00 at prices
more than 60% from the price at 2:40. 10,000 trades for 1.4 million
shares were busted…  Breaking extreme trades sets a bad precedent that may make things worse
next time
.
His perspective tells him that:

What nobody seems willing to say out loud about the events of May 6 is
that, by and large, the market worked the way it was supposed to.

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In the July issue (available July 19, 2010) the regular feature 'Pro & Con' will be renamed 'Wolf Against the World.'

I'll be taking a stance and publish more than one response that contradicts my position.  Join the debate by suggesting topics for future discussions.

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