Markets Break

Markets break.

Not as in "break lower," but actually break. The mechanics of the market break. Think "flash crash.”

Do you know what to do if the mechanics of the markets break, even for a short time? I do, thanks to a very memorable trade. My best trade ever.

I say it is my best trade ever for a number of reasons; some obvious, and some not so obvious, all of which I will talk about in a moment.

I used to be addicted to ice. Not the frozen blocks of water you put in your delicious and refreshing summer drinks, but the Intercontinental Exchange (ICE). I used to trade ICE like a crack addict, drawn into its once wild volatility.

If it is ever really possible to know a stock's personality, I knew ICE's cold. Get it? Cold?


It was September 18th, 2008 and the markets had been going through the type of extreme daily moves never before seen. This was a Thursday, the Thursday before options expiration, and there had been some rumblings on CNBC about a short-selling ban.

If memory serves me right the United Kingdom may have already enacted the ban on their financial stocks, but whatever the exact circumstances, I just had a gut feeling that the same thing could happen in the US.

So I went to my go-to stock, ICE.

It was trading at around $75.00 just before the close and I thought I would take a flyer and buy the closest OTM calls which were the 80's. Because they only had 24 hours to expiration they were trading for just fifty cents.

I bought 10 contracts, fully prepared to lose the whole five hundred if my hunch was wrong. I figured if I was right I might be able to make a couple of grand.

And in fact, after the market closed the SEC did ban short selling in 799 different financial stocks for three weeks. ICE was one of those stocks.

The next morning was insane as all financial stocks were indicated massively higher. Options don't trade in pre-market, but it looked like my "lotto ticket" calls could be worth some serious cash.

Once the market opened it was crazy. Dogs and cats living together crazy.

ICE opened at $87.84 and took off like a parabolic rocket. $90.00, $95.00...I was now 15K in the money.

Sweet. But things were just getting started.

$100.00, $105.00, $110.00, One-Friggin'-Fifteen. I was 35K in the money on a $500 investment. I'll take a 7000% return in 18 hours any day.

But something was wrong.

Very wrong.

The bid/ask on my calls had stopped at $13.30/$13.85.

This was not right. They should be worth at least 35K. I was owed over 21K. WTF?

I waited a bit, thinking maybe there was a data delay or something, but it didn't move. It just stayed there. I defiantly stared at the screen, perturbed that the market wasn't giving me what I deserved.

And then suddenly a voice in my head said, "close your position out right now."

I began to argue with myself.

No way I was going to sell here. Sure, I would make an amazing profit, but there was no way I was going to leave 21K on the table.

2008 was a tough year and this was my chance to extract some rewards from a brutal market. Besides, ICE was at $135.00, and how did I know it wouldn't to $150.00 or higher?

"Sell your calls. SELL THEM NOW," my inner dialogue screamed at me.

I hesitated for just a moment more but then something inside me instinctually knew this was the right move. I hit the bid and was filled.

The markets began to calm down and most of the high-flying stocks came back to Earth. ICE ended up closing the day at $86.61, a little over six bucks in the money.

That night I found out why my calls never traded higher than the price at which I closed them.

Apparently the options specialist backed away and stopped making markets right after the open. Their reasoning was that without the ability to short stock, they could not lay off risk on their positions.

I don't know if that was the real reason or not, but it didn't matter. What did matter is that the market mechanics broke.

The options were supposed to be trading higher, but they weren't. There were unknown factors at play and when that happens, not only do you lose any slight advantage you may have had, you actually are trading with the odds stacked against you.

I got flat and took the profit I knew I could get, opposed to trying to get the one I thought I deserved, because the market wasn't working.

If I had dug in and waited there is a very good chance I would have held those calls all the way back down, thus not losing just a theoretical 21K profit, but an additional 7K of real profit.

This trade was my best trade ever for a number of reasons.

Obviously from a risk/reward standpoint it was amazing. And even though there was no real trade analysis of the set up, I do have to say that I was happy that I was "tuned in" enough with the market to take the opportunity.

But it is really my best trade ever because I did both the right thing and the hard thing, by closing my position out at the frozen bid.

And it taught me that markets break.

Related: When Trading Platforms Break: Your Survival Plan

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P.S. It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.

Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.