My ‘Fat Finger’ Trade, Why You Gotta Love F&O, the Role of Luck
This is a long - but educational - post about trading. I made a mistake while typing in an order to sell a call option on the Nifty. That resulted in an instant (paper) loss of Rs 50,000. Below, I talk about how I managed to get the actual loss down to Rs 24,500. Believe me, it is painful to remind myself of this trade, but I think the details are worth sharing since it is so relevant to all traders.
Background
It is October 30th, the Nifty-50 index is trading at ~5900. I’ve run an analysis on historical price data to compare the index with its 20/50/200-day moving averages. I find that the Nifty is over-extended by quite a bit - similar to the logic in this post. Also, I figure that even if the Nifty does not correct immediately, it is unlikely to go past 6300.
The Trade
So I decide to trade my hypothesis by selling a November 6150 Call for Rs 150. This would put my break-even point at 6300. In other words, even if the Nifty rose from 5900 on October 30 to 6300 by November expiry, I would not take a loss, assuming I put up the necessary margin along the way. In hindsight, I would have made a profit of Rs 7500 (150 * 50) since the Nifty closed below 6150 today.
The Screw-up (aka The ‘Fat Finger’ Trade)
Now for the painful bit. While typing in the order, I put in 5150 as the strike price instead of 6150. Given that the Nifty was trading at 5900, this call contract was worth Rs 1150 (Rs 1150 * 50 lot = Rs 57,500). Well, my order to sell the call went through at Rs 150!
Let me repeat: I sold something worth Rs 1150 for Rs 150. Multiply that by the lot size of 50, and I just gave someone Rs 50,000 as a gift.
The Reaction
Pretty much after I saw the trade book, I realized what I had done. I was stunned. Several not-safe-for-work phrases came to mind - Stupid, What was I thinking, WTF ?!, @#$#, Why Me, It’s not me - it’s the broker, and so on.
I called up my broker to see if there was a way out. They said ‘Sorry, but too bad’ since the order went through the exchange and was filled. Next, I called up Deepak, mostly to inform him of my idiocy and check if he still thought I had any business trading. 
My Choices
I took a deep breath, and figured that I had two choices.
- Close the trade immediately. Buyback the 5150 call at whatever price. Given that this contract was VERY illiquid, I would have to fork out atleast 1150 bucks, thereby booking a loss of Rs 50,000.
- Keep the position open. Add margin as necessary. Hope that the Nifty will drop a lot from 5900 by November 29th (F&O expiry). This would give me some chance of a loss less than 50k. Of course, if the Nifty continued to rise and went to say 6500, I now stood to lose Rs 60,000! As they say, “Hope is a crappy hedge.”
The standard trading mantras are: Cut your losses. Respect your stop-loss. Don’t hope & pray. But in this case, there was no “cutting” involved. If I closed the position immediately, the 50k loss was a given.
What did I do?
It occurred to me that that closing the position immediately did not make sense. But keeping it open as a ‘naked short call’ wasn’t wise either. So what I did was buy the November 6150 call for Rs 150 (150 * 50 = Rs 7,500).
Now, I effectively had a call spread on. My worst case loss was still Rs 50,000, which would occur if the Nifty closed at or above 6150 on November 29. But now I had the chance to significantly reduce my loss, should the Nifty drop!
And, inspite of this mess, you can see why I love options.
The long & tortuous wait
This is the November chart for the Nifty:
A couple of times, the Nifty dropped to ~ 5500, and offered me a chance to close out my spread at a much lower loss. The problem was that there was ZERO liquidity in the 5150 call contract. I could not close the position even if I wanted to.
One thing Deepak pointed out is that when it dropped to 5500 last week, I should have bought a Nifty November future and made my position market neutral. It would need me to put up additional margin, but only for a few days. Also, it would imply that I was ready to accept a guaranteed loss of 17,500 in exchange for an uncertain higher or lower loss. In hindsight, this was probably the best thing for me to have done.
The End Result
Today, the Nifty closed at 5639. The November future (which the option contracts track) expired at 5641. My long 6150 call expired worthless. The short 5150 call expired at its intrinsic value of ~ Rs 490. My actual loss is Rs 24,500.
The trading gods showered a bit of luck on me this month, after the bad bad juju last month.
Morals of the Story
- Check each trade 3 times before you submit!
- S**t happens! Try not to panic.
- There may be ways (using futures & options) to salvage some of the loss, sometimes.
And if any of you have ever traded with fat fingers, do share. Misery loves company.
Related Posts:
November 29th, 2007 at 9:13 pm
Amazing story Kaushik -
I’m sure I have done something similar in the US markets a few years ago. Its horrendous to watch your “fat finger trade” execute chunk by chunk as you watch helplessly. Anyway, I’m sure you have company from most of the trader crowd (if thats any consolation ) !!
Hari
November 29th, 2007 at 10:49 pm
Unfortunate but good story Kaushik.
Thankfully I have mostly escaped Fat-fingers. But stupidities are very common - forgotten stop loss order, selling or covering twice. These have happened too many times. My policy is to close out the deal irrespective of future ‘hope’. And it works out most of the times.
One trade that I remember clearly was a trade, when I was dealing for a client. I was to close out a long reliance position. Client put through the order at the very last minute of trade. At EOD when checking out the position I realised the position had doubled. I had bought the quanity instead of selling them. Client agreed to take the position but refused to put in margins. After series of phone calls, Director allowed the client to carry the position overnight. It was a sleepless night for me, praying for CNBC to give me a glint of hope. Luckily, next day reliance opened 2% up on good Dow upside, we exited in first few seconds and ended up with neat profit.
November 30th, 2007 at 3:31 am
while rolling over instead of selling current month future I sold next month future. By the time I realized what went wrong NIFTY had crashed by ~50 points, so it turned out that I had creaed a natural hedge against my this month future.
And after seeing the trend I decided to close this months future and short next month. Finally trade was in good profit.
Is that slim finger trade ?
:O
JEeet
December 1st, 2007 at 1:33 am
JetJeet: Still fat finger but not quite unprofitable
I’ve had my share of them too, some early up in the process when I would routinely do buys instead of sells, and all sorts of stuff like putting quantity where limit price should go. I once tried to buy a ticker called “5650″ at a strike price of “NIFTY”. Don’t ask me how.
Interestingly Sharekhan seems to have a way for this, now that I think about it - they have different options for “sell” and “short sell” on the cash market, and in the f&o market both the strike price and lot size are combo boxes (rather than free text fields)
Another way to solve the problem - especially for options - is to see that the option is not wildly underpriced (or say x% below intrinsic value). In this case it might just be that the broker himself was on the other side of the trade, so the software might be programmed to only allow such trades but to let the broker gain instead.
But the only reason Kaushik suffered was because he wasn’t too big to lose. Read: http://www.outlookmoney.com/scripts/IIH021C1.asp?sectionid=1&categoryid=7&articleid=5885
- A trader places a fat finger trade in Tulip IT services on day 1 of listing, at 0.25 Rs. per share (market price above 120 at the time)
- a truckload of shares get sold
- the BSE refused to honour the contract and calls these trades at 171+ instead
Obviously some big shot connected to the BSE had the fat finger there.
December 5th, 2007 at 2:38 am
Ouch!! Truly a story to write down and remember. I have this mistakes.xls that I review each day before I start trading with such similar “gems” in there.
I’m damn impressed that you have the character to be able to share this story!
“The problem was that there was ZERO liquidity in the 5150 call contract. I could not close the position even if I wanted to.”
Ah, so true. One of the plagues of the desi options’ market is that only the ATM strikes have any decent liquidity. I guess this will changes as more people get interested in F&O. Thanks in no small part due to amazing blogs like this, of course!
February 13th, 2008 at 11:14 pm
Check this out!
http://ftalphaville.ft.com/blog/2007/03/16/3207/the-curse-of-the-fat-fingered-trader/
February 21st, 2008 at 4:21 am
What a story, good lessons learned though, always respect the stop loss and dont trade on hunches when things dont measure up.