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Trading in futures can bring, if not hedged, unlimited risk.
For a relatively small amount (approximately 50 euro) you can protect yourself against this for a month, so do not take unnecessary risk and check this with your broker/bank.
We take as an example the future of the Eurostoxx50.
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What can happen?
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| Example 1: |
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Say you have taken a long position at an exchange rate of 4.400 (that is: you loose 10 euro per Point when the exchange rate drops) and in the morning the stockmarket opens with a “gap” of 30% down. (A “gap” is the difference between the closing rate of the day before and the opening rate of the day).
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| In this case the total loss is: |
| Previous (closure) |
New (open) |
Difference |
Loss |
Loss |
| Rate |
Rate |
% (GAP) |
in points |
in Euro's |
| 4400 |
3080 |
30 % |
1320 |
€ 13.200,00 |
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In the most extreme situation it is possible to loose totally, with a “gap” of 100%, the underlying value of a future:
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| Previous (closure) |
New (open) |
Difference |
Loss |
Loss |
| Rate |
Rate |
% (GAP) |
in points |
in Euro's |
| 4400 |
0 |
100 % |
4400 |
€ 44.000,00 |
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But even when the fifty largest companies of Europe, from one day to another, have become worthless, loss will be “limited” to 44.000 euro.
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| Example 2 |
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Loss can however be unrestrained. If you have taken a short position at an exchange rate of 4.400 (that is: you loose 10 euro if the exchange rate goes up) and in the morning the stockmarket opens with a “gap” of 200% up.
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| In this case the total loss is: |
| Previous (closure) |
New (open) |
Difference |
Loss |
Loss |
| Rate |
Rate |
% (GAP) |
in points |
in Euro's |
| 4400 |
13200 |
200,00% |
8800 |
€ 88.000,00 |
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The concept “unrestrained” therefore applies because the “gap” up can be every arbitrary percentage.
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How can you hedge yourself against this kind of extreme losses?
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U can hedge this risk for a small price by an 'option strangle'. Ask about this at your broker/bank. Or read explanation options here.
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A “strangle” means you request your broker/bank to buy monthly (every third thursday of the month) a put option and a call option for the duration of 1 month.
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The strangle will be as far under and above the exchange rate that with any stockmarket crash the loss of the future will be limited up to 75% of the recommended seed.
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The costs of this are approximately 50 euro per month.
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This ensures you, in a way, against unexpected great results (both down and up) on the stockmarket/Wallstreet
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Example 1: optieconstruction at a longposition:
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Rate: 4.000
Strangle: 3100 put – 4900 call
Position: long
Crash down: the rate decreases with 50% at 2000
Loss without option structure: 20.000 euro
(2000 points x 10 euro)
Maximum loss with option structure: 9.000 euro
(900 points x 10 euro)
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Example 2: optieconstruction bij shortposition:
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Rate: 4.000
Strangle: 4900 call – 3100 put
Position: short
Crash up: the increases with 60% at 6400
Loss without option structure: 24.000 euro
(2400 points x 10 euro)
Maximum loss with option structure: 9.000 euro
(900 points x 10 euro)
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These are maximum losses when using option structure. Therefore at a crash of 70%, or even 100%, the loss remains, in thes examples, limited to the maximum above.
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Attention!
We do not give tradingadvice, as a free subscriber you will receive the buy and sell-signals of our tradingsystem. For specific advice related to futures / options, etc. or to take individual positions in the market we always refer you to your own broker / bank. Remember!!, Past performance is no guarantee for the future performance!
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Risk management
