How to get out of a position when it is limit locked!!

With the change in limits in the grains, it is not very often that we see the market move and lock at the daily limit.  When it does, it brings up the question, can I get out?  The answer is yes but it will cost you. There are two ways to get out of a position that is limit locked against you.  You can buy the synthetic position that reverses your futures position or you can spread yourself out, IF some other month is trading. We will use Soybeans for examples from April 15th, 2004. 

The synthetic position is not as good as the spread but it will get you out.  If you are long beans and they lock limit down, you do a synthetic short.  If the market is limit down at $9.64 then you would buy a 960 put and sell a 960 call.  That will put you into a synthetic short.  Many times when a market closes limit, we use the synthetic spread to determine where the market is actually trading below the limit.  For instance, if you bought the put at 55 and sold the call for 56, where is the market trading?  Answer, $9.61 or 3 cents lower than the daily limit.  Since you will pay a commission of 2 cents, it just cost you 5 cents more than the current limit price to get out and in fact your not out yet.  The next day when the market is trading, you will sell the futures and unwind your synthetic position.  In the above example, which is true by the way, the market closed on April 15th limit down with the 960 put at 60 cents and the 960 call at 48 cents.  This would mean you have a 5 cent profit in the put and an 8 cent profit in the call.  The position saved your butt as the synthetic market indicates the market will open 16 cents lower the next day.  So like I said, it cost you 5 cents but according to the options, it saved you 11 cents.     

The spread angle is better but it will cost you something too.  Let's assume you are long July soybeans and they drop to limit down but in August they are down just 45 cents so they are still trading.  What you can do is put in an order in to sell the July/August spread.  Do not get confused with the idea of just selling August against your July as that has not done anything but put you in a BULL spread.   What we need is to EXIT the position not be in a bull spread which will loose more money the next day.  In fact, we are putting on a BEAR spread in order to exit the position.  Let's put some prices on this so it makes more sense.  I will use the break in beans on April 15th, 2004.

July drops to Limit down and locks there at $9.64 1/2 while August is still trading at $9.09 down 44 1/2.  The spread has been trading at 52 cents with both contracts trading but as you can see, the current quotes are at 55 cents.  In order to get out, we put in an order to sell July and buy August or to "sell the July/August spread."  At the same time, you put in an order to sell August beans.  In regards to the spread, remember we are selling July and you will get a great fill on your July selling it at 9.64 1/2 or at limit down, EVEN THOUGH THE CONTRACT IS LOCKED AT LIMIT DOWN.  Now you get the fill on the buy and find out they gave you a $9.12 fill with the market trading at $9.09.  Then comes in the fill on your sale of August futures and sure enough, it is at $9.09.  The end result is your out, but you paid 3 cents to get out.  By the way, if you would have waited, August locked limit down at $9.03 1/2.  With the synthetics showing the market 16 lower the next day, this would have been a disaster if you had waited.

So in regards to the question, can you get out?  Yes!!  Just remember, it will cost you but at least you have stopped the bleeding and can start fresh the next day.