HomeMayday Protocols – that every option seller should followBlogMayday Protocols – that every option seller should follow

Mayday Protocols – that every option seller should follow

Best Practices:

  • Matching SL orders: Make sure for every ‘SELL’ order, corresponding ‘BUY (Stop Loss)’ order to be there in the system in the form of ‘Trigger-pending’ – ALWAYS 
  • Hedging: Hedging is always used for margin benefits. But, whenever the hedging costs are lower, it is recommended to shift the hedges closer to the ‘SELL’ positions to withstand any ‘SWAN’ movements

Problems and Mitigants:

Problem 1:
  • Broker freeze: Problem occurs when we are unable to square off the positions, as your broker froze.
  • Mitigate: As long as pre-determined SL is in the system (refer Matching SL orders), which will be with the exchange. Hence even if the broker froze, SL will be executed
Problem 2:
  • Broker froze and SL Jumped: Broker froze and simultaneously SL jumped, creating ‘trigger – pending’ to ‘Limit’ orders
  • SL order cancellations: At times, exchange will cancel all trigger-pending orders, as your broker didn’t maintain sufficient margin. Usually, broker rectifies it within few mins and you shall be able to replicate your SL orders again. if not, be prepared
  • Mitigate for 2(a) and 2(b): Always keep sufficient cash (min 5% of the capital) in a backup account (with another broker). Once the SL jumped in the main account, we shall take counter positions in the backup account with the same strike price and with the same Qty
Problem 3:
  • Exchange freeze: Problem occurs when either of the 2 exchanges freezes or Both freezes at the same time.
  • Mitigate: If NSE freezes, take counter positions in BSE and if BSE freezes, take counter positions in NSE. If both freezes, take counter positions in SGX nifty. These positions may not be exact counters but it can limit the damage to some extent because of different instruments traded.