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Emergency plans and precautions

Discussion in 'General Discussion' started by ooo|ooo, Feb 13, 2016.

  1. ooo|ooo

    ooo|ooo Active Member

    When we trade complex options positions that have a lot more "actual max risk" than planned capital, or other strategies with net short options (Ron Bertino's ratio hedges), there's always the danger of not being able to manage those trades for a prolonged period of time. You don't have to have much imagination, but everyone can suddenly become ill, have an accident or whatever that puts you in a state that doesn't allow you to trade.

    What measures are you taking that limits the damage that your account could suffer in such a case? I'm curious, because no one I know has enough knowledge about trading in general, and about my trading platform specifically, to close out my positions in an emergency.
     
  2. ACS

    ACS Well-Known Member

    The only thing you can do for the type of situation you describe is to limit your at risk capital to a small enough percentage of your net worth to allow you to recover from a total loss of that risk capital.
     
  3. Rick

    Rick Active Member

    thanks for bringing this up because I have been meaning to address this for my accounts in case I become incapacitated.

    I would suggest that you make sure a family member or other trusted party has your broker's trade desk phone # along with a list of your accounts.
    Obviously the complexity of your positions will determine how "gracefully" their traders will probably be able to exit your trades.
     
  4. ooo|ooo

    ooo|ooo Active Member

    Agree, that's definitely the safest way to do it. Unfortunately, you cannot trade something like a ratio spread, which has theoretically unlimited risk.

    I've thought about this. How does "calling your broker" work in general? I guess they ask for some kind of credentials before they execute any trades.
     
  5. tom

    tom Administrator Staff Member

    You'd probably have to check with your broker to find out what they would require to authenticate the request to close all open positions.
     
  6. GreenZone

    GreenZone Well-Known Member

    I share your concern.
    In fact, this was part of the reason for the creation of the Space Trip Trade.
    Black Swans come around more often than people think, so I didn't like the idea that a 10% gap down would significantly hurt my ATM structures.
    I wanted to have some kind of hedge for my ATM structures, such that with a 10% gap down my ATM structures would be hedged.

    I also share your concern over naked or partially naked positions, which is why I'm still fairly resistant to doing the ratio STT over the condor STT, but as you saw from my presentation, keeping the PM margin the same across a ratio and condor hedge, the ratio had half the total dollar risk even for a massive gap down (my example ended up needing a gap of over 75% prior to the dollar loss being greater with the ratio spread).
    So I still need to keep experimenting with both of these positions and perhaps try to get over my "concern" over partially naked positions.

    I'm also in the process of developing multiple other strategies in order to hedge a portfolio, and doing so in such a way that these hedges are either very low cost or even end up making money (as in the case of the Space Trip trade).
    I'm quite paranoid over what I think is coming in the not too distant future, which is the worst worldwide financial crash the world has ever seen.
    So I definitely want to be well hedged to the downside.

    With regards to your point over what to do if you get hit by a bus, I would suggest that you consider pairing up with a trading buddy, and pass on the details of your trading buddy to your spouse.
    In the event of some event where you are unconscious (or worse), then your spouse can get in contact with your trading buddy, give them the username and password for your broker account, and proceed to safely shut down all of the live positions.
    If your spouse can't get in touch with your trading buddy, then the backup plan would be to call the broker to inform them to shut down your positions - but this is riskier since they won't give a damn how much money you lose in that process.
     
  7. Georges

    Georges Well-Known Member

    Has anybody filled a Death Document with IB?
    Perhaps this is good when you have a single account, and something happens to you?
     
  8. ooo|ooo

    ooo|ooo Active Member

    I'm with IB. Their website doesn't mention anything, so I guess I'll have to call them sometime next week to check it out. I might call as "Tom Nunamaker" and see how they react ;)

    I really like the concept of the STT, and I'll definitely implement it within my portfolio.

    I have the same concerns: I see the numbers, but the fact of being naked feels very uncomfortable. Anyway, it's absolutely necessary to manage the trade "when you need it", i.e. when markets head lower. Especially in a chaotic market when things like execution and wide bid/ask spreads become a concern.

    I'm not sure about that: if things get as bad as you seem to imagine, you should also be worried about counterparty risk and broker insolvency. Not sure where I'd like my money to be in such a case.

    I guess that's the way to go. I don't have any close family, so I need additional security: does anyone have experience with a "dead man switch" service?
     
  9. ooo|ooo

    ooo|ooo Active Member

    Could you explain what a Death Document with IB is?
     
  10. Georges

    Georges Well-Known Member

    ooo|ooo likes this.
  11. ooo|ooo

    ooo|ooo Active Member

    "Only United States-based Single accounts are eligible for Transfer on Death registration. IRA accounts are NOT eligible."

    I'm in Europe, so this is not an option.
     
  12. Andrei

    Andrei Well-Known Member

    There are two issues here:
    1. Hedging against a adverse market moves
    2. Contingency plans in case of personal problems or tragedy.

    It is very hard, probably impossible, to set a up a perfect hedge (i.e low cost / high impact) against a complete market meltdown. In 2008 is personally observed, on very large scale, how "very sophisticated" market hedges not only failed but made the situation worse. Panics create huge imbalances and lack of liquidity. And in situations of a complete meltdown, as ooo|ooo mentioned, one must also face "systemic" financial risks, where your broker is no longer able to fully and/or timely meet their obligations.

    For "non-Black Swan size gaps/meltdowns" I find STT very interesting and I am planning to do my own tests.

    As far as the personal related events, there are many good and not very difficult solutions, which many of us often postpone and ignore. Several solutions have been already mentioned in the posts above. All of the come down to either leaving good instructions and passwords on how to liquidate largest exposures and/or formalizing this process with you broker.
     
  13. meyer99

    meyer99 Well-Known Member

    TOD (transfer on death) is a kind of individual REGULAR account that behaves like an IRA in terms of beneficiaries. In other words, like in an IRA, you name your beneficiaries and all the account balances get allocated to the beneficiaries, bypassing all legal procedures (Estate, etc.). IB, TOS, Fidelity, Vanguard have TOD accounts. Make sure that the arrangement works in your specific State (ask your institution). You have to open new TOD accounts, move your funds to such account and appoint your wife as agent in the new accounts (in case you don't die but go cuco and there is no power of attorney).
    You don't need this in an IRA since the IRA gives you the ability to name beneficiaries.
    In short talk to your lawyer.
     
  14. Jim Clements

    Jim Clements Active Member

    TOS has the capability to enter contingency orders that can be triggered to be submitted at a specified date/time, using a number of available rules for price, time in force, and conditions for the underlying. For example, I could have an order to sell my March RUT bearish buttterfly, at market price, to be submitted at 12:30 pm PT on 3/17/2016, just before expiration market close. If I am incapacitated at that time, the order would close out my butterfly. Of course, if I sell the butterfly before then, I have to remember to cancel the contingent order. I could enter contingent orders for all of my open trades, to be executed right before expiration, or perhaps right before closing each Friday, at which time I would cancel/renew them for another week. Not an ideal solution solution, but I don't have any knowledgeable family members or trading partners/friends to handle these closing tasks. This would provide some protection until someone comes in later to settle the trading account.

    TOS Contingency Order.JPG
     
    ooo|ooo and GreenZone like this.

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