Is this allowed?

[GateFifty]

Hi, I just wanted opinions on whether this is allowed. Say you are trading a stock that has a huge announcement coming up. Such as Citigroup on friday, which turned out to plummet 50% in premarket.

My question is, if you had gone long and short this stock with a even amount each way the day before, covering the possibility that this news was already priced in and it would go up, but also covering this possible drop. but then setting a guarentted stop loss at 10% away on each trade. Now if it goes down your short position would have made 50% but the long position would have got stopped out at -10% and your broker taken the 40% hit (with the paid for gaurenteed stop loss). If you have a hugely leveraged position, I can see this being a good way to trade big news on banks when announcements are coming.. theres often an unforseeable swing upto 30% either way before markets even open.

Would this be allowed or is your broker likely to close your account for this?

 

[TheBramble]

Check the small print in the T&C on guaranteed stops from your broker.

Plus, did you take a look at the spread on the way up to the announcement? Could you have got ANY fill?

And do you have two separate accounts to handle these two trades?

 

[donaldduke]

I would guess they might increase the min garanteed stop distance to more than 10% a head of major out of hours new events for a particular stock...

 

[rathcoole_exile]

why open both trades anyway ?
why not bracket the price range with 2 resting Stop Entry orders - a Buy Stop to go Long at Price +n, and a Sell Stop to go Short at price -n
why on Earth deliberately open a losing trade, just let Momentum kick in and hop aboard.

and if you don't know about Buy Stops and Sell Stops, educate yourself.
and if your broker won't permit those types of Entries, change broker.

 

[wasp]

I find opening a position in both directions each time a brilliant hedging edge and would recommend this to anyone. Ignore those who disagree, they just don't get it... Do it every time, you will prevail!

 

[wasp]

Said in my best 'Fast show' voice....

''This week................ I will be mostly winding up Gammajammer!''

 

[arabianights]

you've essentially bought an exotic for the spread, I don't see how it "isn't trading"

 

[ns1000]

Looks as though several posters haven't read the post correctly. What you're doing is creating a guaranteed stop entry order. The idea is that you have no position until one of the stops is filled; you'll be in profit as long as the gap is more than the stop distance, and as long as the stock doesn't rebound. It may well work sometimes, but the problem is how do you identify stocks will will move more than 10% on results, and if the news is mixed you run the risk of both stops being filled which will probably wipe you out.

 

[rathcoole_exile]

Looks as though several posters haven't read the post correctly. What you're doing is creating a guaranteed stop entry order. The idea is that you have no position until one of the stops is filled; you'll be in profit as long as the gap is more than the stop distance, and as long as the stock doesn't rebound. It may well work sometimes, but the problem is how do you identify stocks will will move more than 10% on results, and if the news is mixed you run the risk of both stops being filled which will probably wipe you out.

no, that's what i'm suggesting he do, but it doesn't appear to be what the OP is planning to do if you read his first message "if you had gone long and short this stock with a even amount each way the day before"

 

[ns1000]

no, that's what i'm suggesting he do, but it doesn't appear to be what the OP is planning to do if you read his first message "if you had gone long and short this stock with a even amount each way the day before"

He goes on to add ' setting a guarentted stop loss at 10% away on each trade'. Your absolutely right though. His way, he avoids the slippage potential.

 

[GateFifty]

There are a number of times i've seen big news coming up (as in the case of citi on friday) and there has been no change in the spread the thursday before. I actually did this trade on citigroup on friday. I wasn't expecting a 50% drop, but I was expecting a 15% or so move in premarket (with my level 1 account I cant trade in pm). I was prepared to take the hit for paying for the gaurenteed stop loss if it didn't work out, and I was in front of the pc, should there be fast movement in the other direction as soon as the market opened...

It actually worked out and the long position was - $1900, and the short was + $1900, but the stop on the long triggered as soon as the market opened and I only lost the 10% on the long position, the broker took the hit for the other 40%. the rest was profit (minus the cost of the stop loss). I was 1/2 expecting my broker to ring me up, and expecting a call complaining today..

This is why I asked because it almost seemed to easy and I have made money at the brokers expense. Big moves in premarket are happening all the time at the moment with these banks. Of course if it hadn't have moved in premarket, I could have looked which way the price was going when the market opened and closed the loosing trade.

 

[TheBramble]

So you do have two accounts with your broker?

 

[anley]

What happens when both stops are filled within 30 seconds of each other? Then you've lost a quick 20% and have no position.

Just because a market booms or slumps after an announcement doesn't mean it doesn't first have a sharp move the other way. It happens all the time.

 

[donaldduke]

You can bet they wont wait till it moves 10% before they stop you out.
They widen the spread and get you out when the underlying is only at -8 or -9%, but you get filled at -10%.

This strat only stands a chance if the market is completely closed during the announcement.

I know the US, stock specific news, like earnings, happen in the pre and post markets when stocks are trading albeit more thinly than during regular market hours.

When does news tend to come out for UK stocks?

 

[arabianights]

when preston leaks it

 

[stevespray]

This strat does work - I tried it on CMC years ago. Much of the time it depends on your broker and the T&Cs. Some have suggested not opening postions but just using g/teed stop orders to open but not all brokers allow this kind of order - in fact very few allow it. Most will only allow a g/teed stop order to be attached to an open position therefore you must have two open positions each with an attached orders. I know that a broker phoned me once to say that they had brought in a "new rule" meaning that you couldnt have open longs and shorts in the same market with attached controlled risk stops. This was back in the dot com boom of 1999 mind where announcements could double or half a share price over night. It worked well but one or two dealers got wise to it and stared to do what they could to disrupt dealing.

Steve.

 

[mel_pub]

This is essentially what J.Kerviel was doing. Arbitraging listed barrier options (knock out) on DAX from competitors. Buying the Knock out and heging hisself with futures.

Models used for exotics like barriers are the same than those for "garanteed stop", you essentially try to price the gap risk (jump). Most people (I-banks let alone bucketshop) use primitive models, like adding 20pts to the price of the turbo (ie DAX 6038-> KO call 6000 priced at 58 = Price-Strike+"Gap" premium). They don't change the premium often enough according to market conditions, or at least not with the same accuracy as some clever quant/trader can, and they get ARBed !

Here you'll find all the positions of J.Kerviel from 07/2007 to 11/2007 on his legitimate (and profitable) trading :
(http://www.socgen.com/sg/file/fichierig/documentIG_23987/green.pdf) page 41

Conclusion of this :
- ARBing gaps resulted in a 3.1M€ profit for J.K and 2.3M€ for his mate
- Directional trading on ESTOXX resulted in a 5Bn€ loss

So it IS a good opportunity, BUT it requires a good model and knowledge of both how to price jump probabilities and knowlege of competitors (or bucketshop in our case) that will misprice it.

In the case of "turbos", there's a competition between Banks, because the products are similar and listed on exchanges, so people will go for the cheapest turbo which drive the gap premium down. I dont know if people will move from say IGMarket to another CFD bucketshop because the "guaranteed stop" is cheaper there. Hence CFDs brokers might rise the price quite above what their (and even yours) model tell them, with a good safety margin.

 

[stevespray]

My guess is that the bucket shops watch things like this more closely when market conditions demand it. Also I found that once I was 'known' to one or two of the shops they watched things I was doing more closely. Low and behold if you did manage to squeeze a free lunch they'd just alter the rules or, as you suggest, upped the premium.

Steve.

 

[alemcodon]

i always assumed if you placed a buy trade and then placed a sell trade, it would just sell the buy trade. i didnt think ANY broker would allow simultanious trades on a single stock.

but, it seems a very simple but genius idea. im definately gonna try it.

i know many of you are playing down this strategy but is there anyone who has tried and failed? if it fails, you stand to lose a huge sum of money, also 10% stop loss seems a large margin for this strategy. i think 5-7% would be better and reduce risk of huge losses.

if i lose money im gonna strangle the guy who started this thread, if i win, ill thank him.

 

[maxima]

he might happen to be taller and stronger than you...