What happens if you can't exit a position on your brokerage platform?
Do you sit and wait it out, hoping for a quick resolution and an opportunity to exit at your price, or better?
Has that ever worked out for you?
I'm fairly certain that has nearly never worked out for me. If it has, it certainly didn't compensate me for all the times it hasn't. Not financially, and certainly not emotionally.
There's a certain panic that sets in when we lose the ability to take control when we need to. We can't control the markets, but we can control how we react to them. We can choose to take action when we need to.
Except when we can't.
Your broker has a glitch, the platform is down, and nobody will take your calls because their customer service lines are being bombarded by traders just like you who are stuck in positions, looking for a quick exit.
This is a pretty powerless feeling.
Some traders I know experienced this on Friday when a well-known broker for some reason wasn't allowing trading in a certain ticker. It was an error on the broker's part, but nonetheless, customers of this broker went the entire day without the ability to exit their positions in this name.
What can one do to prevent a situation like this happening to them (again) in the future?
One relatively simple approach is to have a backup trading account with another broker. You don't need to fund it with too much money. Just enough to cover the risk of a typical trade you hold in your main account.
For example, let's say your main account has $50,000 in it. If you're like me, you rarely (if ever) will risk more than $1,000 per trade (2% of the capital in the account). So leave $1,000 in this spare trading account (preferably one that pays you interest on your cash).
Now, let's assume you're long a bull call spread. The difference between the strikes is $10 and you are long one contract and short one contract.
When looking to exit the trade (whether to book a gain, or to protect capital if the position is losing), you find that your broker is unavailable. You cannot hit your exit. Is it time to panic?
No.
If it looks like you won't be able to trade in your main account for some time and/or the market is moving fast and you are uncomfortable waiting for your exit, you have an easy way out.
Simply open your backup brokerage account and enter the order you'd like to enter on your main brokerage to exit the position. When filled, you will have opened a new position that is exactly opposite to the position you hold in your main account. Net-net, this means you're no longer exposed to this position. Any gains in one position will now be equally and exactly offset by losses in the other.
When the smoke clears and you're finally able to exit your original position, you can then calmly exit both positions in both accounts nearly simultaneously. You can then transfer any gains from one account to the other to get back to where you should be in each account.
Of course, this results in added commission costs. But that is a small price to pay for piece of mind.
Side note: I realize if you're trying to exit a simple long call, you'd have to sell a naked short call in your spare account and you likely won't have the margin available if you don't keep much money in this account. In situations like this, selling a call spread (short the call you want to sell, and purchase a cheap further out-of-the-money call) will help mitigate your downside while working within the available margin you have.
Sean McLaughlin | Chief Options Strategist, All Star Charts
