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March 15, 2011

The Markets are Melting Down this morning

The markets are bleeding red this morning. The Nikkei was down over 10%. The German DAX was down over 4%. S&P futures are down over 34 as I write this and Treasury yield have plunged. The world financial markets are in panic mode. Risk aversion is on and everyone is fleeing to the US Dollar.

So what does that mean to an option trader?

You’ll experience fast moving markets today. Bid/ask spreads will widen and it will be difficult to get filled at the mid-price. Volume will be heavy and firms with help desks will possibly have delays for you to speak to someone if you need help. With heavy volume, broker platforms will struggle to keep up. You may see transient errors in account buying power, margins etc.

The Markets are Melting Down
What can I do?

– The most important thing to know is if you need to close a short option now, use market orders. Limit orders don’t work very well in fast markets. Just bite the bullet and stop your bleeding.

– Don’t chase a bad position. If you’re at or past your maximum loss, don’t fool around trying to save your position. You could easily take a massive hit to your account that will take a long time to recover. Don’t do it. Honor your max loss and get out.

– Don’t react in a panic mode. You seldom make good trading decisions under stress. Try to neutralize your positions to give you time to think, and the market time to settle down.

– We use probabilities for income type types. Panic markets aren’t normal and we probably shouldn’t be trading during them unless you like risk. Consider reducing your positions or going flat until the market settles down.

In summary

Just be careful. Don’t rush learn the facts here now. Don’t make decision under stress. Don’t chase bad trades. Honor your max loss and use market orders to close positions if you absolutely have to close something today.

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Tom Nunamaker

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