The Markets are Melting Down this morning

by Tom Nunamaker on March 15, 2011


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. 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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{ 2 comments… read them below or add one }

Bay Su March 15, 2011 at 2:58 pm

Hello Tom, Dan and all the good people at Sheridan Mentoring,

This weekend I was analyzing the impact of global supply chain connected with the earth quake damaged area of Japan. My worst fear may have been confirmed.

The Northern district of Tokyo is home to many of the Semiconductor manufacturing. Estimate (CNBC, CNN and Bloomberg are reporting similar numbers) are as follows

40% of all memory chips are made in Japan
20% of all semi-conductor chips are made in Japan

For global manufacturing of electronics, this is like losing Saudi Arabian oil production. The world electronics component manufacturers are not thought to have 20% excess capacity or ability to produce those items sourced from Japans high technology manufacturing centers. The memory and IC shortages would impact China’s production in a week or two. Then the shortage of finish goods could impact the world economy in three weeks to a month.

The shut down of the Shendai N-power plant, lack of electricity to the manufacturing facilities and proximity to the manufacturing site will have global economic consequences.

I felt this was critical information that I needed to share with everyone.

Please double check my information. I am very frightened by the quick research that I did.

It will be in everyones best interest to help the Japanese people and get the power restored to those manufacturing sites.

My heart goes out to the people of Japan. But we also have to comprehend the global interconnected economy.

Please warn our community to be very careful of buying tech product companies on the dip. This time it can be very different because of the global supply chain disruption.

Best Regards,
Bay Su

Bay Su March 15, 2011 at 3:29 pm

Dearest Sheridan Community,

Updated report from PCWorld and Ralph Jenning, IDG News 14 Mar 11, “Taiwanese Semiconductor Firms Face Supply Shortages in Japan”

“Japan supplies an estimated 50% of raw 12 inch Silicon wafers and 30% of raw 8 inch Silicon wafers to Taiwan.”

Single Crystal Silicon Wafers are the raw substrate material to print IC chips onto. Without the raw Si-wafer, it’s like an artist without canvas or printer without paper.

Please be careful, this is very different from a normal disruption in the global electronics supply chain.

Best Regards,
Bay Su

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