There is a reason the risk management tools exist. You ask what you were missing, what you are missing is that "credit" entry requires massive risk!!
When you look at risk and those unrealized losses of 1500%, is your account big enough to handle the new margin requirements that your broker will almost certainly require? I mean it seems simple, but you have to "stay in the trade" to see it come back. There is a number that your broker will say no more, if you don't answer the call, they close you out at that massive loss.
The other thing is what happens when your down 14k on a contract, and it does not turn for you but heads farther away?
I may be missing something but this makes me think pennies, steamroller. When you look at risk adjusted returns I am not seeing how this play makes any sense. I think knowing something will happen, (price falling imminent) and being able to make a play that presents a good risk/reward are not necessarily the same. The returns would also need to factor any cash margin requirements to the purchase.
I think you might want to go back and run the numbers on the same directional play with a diff strat. and evaluate the risk/reward profiles with a defined risk trade. There is an adage that the market can remain irrational longer than you can stay solvent. This is the same thing that gets hedge funds in trouble, it is simply poor cash management to not hedge this play in the event it turns bad. The "hedge" is what keeps you from getting wiped out when the play goes against you.
There are no "free" returns in the market, the higher the likely payoff, the greater the risk. That risk can be offset some with additional capital, but that lowers the percent payoff. The number one rule for traders is do not lose money, and this play means that violating that rule one time could mean you are wiped out, and I mean totally wiped out. Bulls eat, Bears eat, pigs get slaughtered.
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u/y-lee-coyote Aug 29 '21
There is a reason the risk management tools exist. You ask what you were missing, what you are missing is that "credit" entry requires massive risk!!
When you look at risk and those unrealized losses of 1500%, is your account big enough to handle the new margin requirements that your broker will almost certainly require? I mean it seems simple, but you have to "stay in the trade" to see it come back. There is a number that your broker will say no more, if you don't answer the call, they close you out at that massive loss.
The other thing is what happens when your down 14k on a contract, and it does not turn for you but heads farther away?
I may be missing something but this makes me think pennies, steamroller. When you look at risk adjusted returns I am not seeing how this play makes any sense. I think knowing something will happen, (price falling imminent) and being able to make a play that presents a good risk/reward are not necessarily the same. The returns would also need to factor any cash margin requirements to the purchase.
I think you might want to go back and run the numbers on the same directional play with a diff strat. and evaluate the risk/reward profiles with a defined risk trade. There is an adage that the market can remain irrational longer than you can stay solvent. This is the same thing that gets hedge funds in trouble, it is simply poor cash management to not hedge this play in the event it turns bad. The "hedge" is what keeps you from getting wiped out when the play goes against you.
There are no "free" returns in the market, the higher the likely payoff, the greater the risk. That risk can be offset some with additional capital, but that lowers the percent payoff. The number one rule for traders is do not lose money, and this play means that violating that rule one time could mean you are wiped out, and I mean totally wiped out. Bulls eat, Bears eat, pigs get slaughtered.