FuCX Me. Thanks. To be avoided.
I have been checking on various matters relating to collection of negative equity balances etc. A couple forgave them. Most did not. I am undecided as to whether to use guaranteed stops or options to protect positions in markets where there is embedded event risk. I guess 'it depends'. What I am learning is that the true liquidity in CFDs doesn't seem to be anything like the liquidity actually in the underlying market that they portal in to. In the ideal, they should be pretty much identical. Of course, all is not ideal.
If someone has color on that, pls pipe up. I'd like to understand the micro-structure better. It seems to have macro effects - pretty much uniformly negative from a consumer's perspective.
Options, whilst they can be quite costly for markets with a high implied volatility, are definitely worth serious consideration.
A stop can too easily result in a position getting canned at inopportune times during such crazy whipsaws.
A bought call/put option can confer all the upside/downside protection required for a predefined cost. Those employing them for this purpose needn't fear the dreaded market gaps and crazy whipsaws, (except perhaps when the positions are on separate accounts with different brokers).
My problem, last Friday, was that I was hedging those short positions with call options on one of my accounts with another provider.
Having my short exposure blown away at an unrealistically high price, and literally having no time to act before the market promptly returned from whence it came, seriously undermined the efficacy of the protection afforded by my call options.
Happily, the after hours futures market looks to be very close to the level where I was taken out. Hopefully I'll get the opportunity to exit the call options at a level close to the level at which my short exposure was blasted away or possibly recreate the lost short exposure on the options account.
For the benefit of those previously unaware, there are two morals to this story!
One is to think very carefully about the additional risks associated with holding opposing exposures across two providers (logistics of managing margin during sharp swings, possibility of failure of one broker etc.).
The other is that one needs to ensure that there will always be compatibility of pricing between both brokers!
Failing to consider, either of the above, can have catastrophic effects on what might otherwise have been a perfectly sound trading strategy.