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  #101  
Old 20.01.2015, 16:11
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[...] The only thing that is risk free is a deposit account that is underwritten in your own currency. [...]
This is nowhere near risk-free.

The risk profile depends on the locality and the details of the scenario. In general I would view the main risk areas as counterparty risk from the bank, and currency risks. Smaller but significant risks include state confiscation, and fraud.

Dealing with counterparty risk from the bank first: the bank may go bust. If they do, there may be a government scheme to protect some savings. This protection is usually subject to limits, and the degree of mitigation also depends on whether the government (or insurance scheme) in question will see through on their promises.

Currency risks: just because it's "your own" currency doesn't eliminate currency risks. If your currency is debased by printing (most are) and loses 5% of its value in a year to inflation, and you're earning no interest, you're losing 5% a year. Swings are going to affect your purchasing power too, for any tradable goods.

State confiscation: it happens. Some "bail in" schemes amount to state confiscation. There is some overlap with other risk areas: if a bail in is restricted to a single bank, it really falls under counterparty risk; inflation can be viewed as continual state confiscation via a mechanism most people seem unable to understand well.

So not risk free.

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[...]This bank / FX shop may soon go into insolvency themselves, so you might not need to worry about this debt as it's their fault as well for allowing you to be leveraged to your eye balls.
[...]
Treating the two reasons you give separately:

If the shop is insolvent, someone will still be collecting on their assets, including OP's debt.

The question of whether it's the shop's fault for not communicating risks depends on the detail. I don't know much about Switzerland's regulations for this. In most places, there is a concept of something like "experienced investor" where the customer is expected to be able to be diligent on their own behalf, and requirements for clear communication whenever you can lose more than your principal. Whatever the rules are here, applying them is going to require more of this case's specific details.

Last edited by 3Wishes; 20.01.2015 at 16:23. Reason: merging successive posts
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  #102  
Old 20.01.2015, 16:53
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Re: In Need of Advice (Huge forex trading loss)

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Please note that there is normally no "loan" involved when trading options, even if you lever yourself. The mechanism is not that the broker lends you money, but that you only have to post a fraction of the value of a contract as collateral. The idea being that the mandatory collateral should cover most of the expected volatility. To illustrate on a simplified example:

Imagine an option contract with a value of $1000 and a margin of 5%. That means, that you only have to hold 5% of those $1000 to buy or sell this contract. So you pay down $50, and you realize whatever PNL is realized on $1000. Note that there is no loan involved.

The risk thus does not come from a loan per-se, but as I wrote before, the fact that your losses can exceed the amount of cash you actually hold on your account. While you might think of this as a loan in very simplified ways, it is much better to be exact about these things because as they say: "assumptions are the mother of all ups". E.g. the legal framework applicable to defaulting on loans might not apply in this case.
It is very unclear what a lot of this means. When you talk about "value of $1000", do you mean the strike price of the option contract, the price the option contract is currently trading at, or something else? An option with a strike price of $1000 can easily trade for $1 if the chances of it coming in to the money (the spot price crossing the strike price) before expiry are very low, but this has absolutely nothing to do with either leverage or a vague notion of collateral covering expected volatility.

If you have ended up with options on your balance sheet, but have only put up part of the money required to buy those options at the time, then where did the rest of the money come from? Leverage via a loan is one possibility, but I don't think you describe an alternative mechanism.

If you don't actually have the options, but a service is trying to emulate you having them, then it's really a bucket shop and get out!

Options and leverage are orthogonal concepts and a number of posts in this thread conflate aspects of them unnecessarily, reducing clarity.
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Finally, I'm not sure what OPs strategy was, but my guess would be that they were short EUR puts, rather than long CHF calls. E.g. they didn't buy options long term hoping that EUR will appreciate, rather they were advised to sell EUR puts - bet that the peg will stay and collect a steady, "naively risk-free" premium for selling the options. It is tough to lose this much by buying options, it is usually the other way around. Kind of like selling insurance for the peg staying in place. On face value, it could make sense. Very few expected the SNB to do what it did. I can see the sales pitch much better for this scenario - e.g. the SNB is very conservative, they'd never make rash moves etc...
[...]
Yes, this is one possibility, assuming short-selling of options contracts is available at retail level (is it really? I don't have experience of this, but would expect it not to be. After all, to take a short position in an asset with an options market, just buy a put option, surely? To take a long position, buy a call option? Then the amount you risk is limited to what you paid for the options. Being able to short sell options just seems pointless. Leave the issuing of options (and short selling options has similar risk profile to issuing them) to the institutions).

If it were indeed the case, then "selling insurance for the peg staying in place" is a nice analogy.
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  #103  
Old 20.01.2015, 17:04
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Re: In Need of Advice (Huge forex trading loss)

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Buying a leverage product on margin is even more crazy but even then you would not end up in a situation like this when buying an Out of The Money EUR.CHF option expiring in one year. As the margin requirements for this are probably 100% compared to around 8% in the example I gave above.
Hang on, "margin requirements of 100%"? If you're putting all the cash up front, it's not really on margin at all is it? It's just you buying the assets with your own cash.

We don't need to complicate everything so much!
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  #104  
Old 20.01.2015, 17:05
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Re: In Need of Advice (Huge forex trading loss)

this really is one huge willy waving thread now
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  #105  
Old 20.01.2015, 17:09
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Re: In Need of Advice (Huge forex trading loss)

@Armed_Neutrality: Slow the heck down! There is etiquette to this. You should allow people to get back to you before you go off on one!

I am not going to reply to all your sudden rush of responses to all posts on this thread. Because A) we've already established it's pointless discussing all of these technical financial stuff and B) I can't be bothered.

If you want to argue for the sake of it please choose another thread.
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  #106  
Old 20.01.2015, 17:10
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Re: In Need of Advice (Huge forex trading loss)

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this really is one huge willy waving thread now
Did you leverage that too? Or did you take an option to expand?
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  #107  
Old 20.01.2015, 17:15
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Re: In Need of Advice (Huge forex trading loss)

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Did you leverage that too? Or did you take an option to expand?
His problems started when he broke through the barrier
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  #108  
Old 20.01.2015, 17:16
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Re: In Need of Advice (Huge forex trading loss)

I'm not allowed to trade anymore
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  #109  
Old 20.01.2015, 17:17
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Re: In Need of Advice (Huge forex trading loss)

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"Insolvency is legally defined as follows: A company is insolvent (unable to pay its debts) if it either does not have enough assets to cover its debts (ie value of assets is less than amount of liabilities), or if it is unable to pay its debts as they fall due."
Thanks. I see that one can use the terms cash-flow insolvency vs balance sheet insolvency, or actual vs technical insolvency, when there is a need to distinguish. With cash-flow & actual insolvency referring to what I was taught to call illiquidity.

Anyway, I retract the original "correction".
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Old 20.01.2015, 17:19
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Re: In Need of Advice (Huge forex trading loss)

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His problems started when he broke through the barrier
I heard it was pegged to a Swissie for a long time.
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  #111  
Old 20.01.2015, 17:21
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Re: In Need of Advice (Huge forex trading loss)

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I heard it was pegged to a Swissie for a long time.
Ouch.
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  #112  
Old 20.01.2015, 17:22
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Re: In Need of Advice (Huge forex trading loss)

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Ouch.
I've heard you'll be embarking on some QE soon. Please give some details. Thanks
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  #113  
Old 20.01.2015, 17:24
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Re: In Need of Advice (Huge forex trading loss)

the peg came off and it dropped like a stone
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  #114  
Old 20.01.2015, 17:24
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Re: In Need of Advice (Huge forex trading loss)

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I heard it was pegged to a Swissie for a long time.
I heard he was long when the Swissie was pegged. But when the Swissie decided to discontinue with the cap, his long shrank and became short leaving him with undesirable predicament.
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  #115  
Old 20.01.2015, 17:28
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Re: In Need of Advice (Huge forex trading loss)

Still looking for a square peg to fit fit into a round hole. Will I earn capital or take a loss?
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  #116  
Old 20.01.2015, 17:29
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Re: In Need of Advice (Huge forex trading loss)

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I've heard you'll be embarking on some QE soon. Please give some details. Thanks
Do catch up. Please refer to this post.. Make the requisite deposit and I may oblige
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  #117  
Old 20.01.2015, 17:40
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Re: In Need of Advice (Huge forex trading loss)

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@Armed_Neutrality: Slow the heck down! There is etiquette to this. You should allow people to get back to you before you go off on one!
Soz; point taken.

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I am not going to reply to all your sudden rush of responses to all posts on this thread. Because A) we've already established it's pointless discussing all of these technical financial stuff and B) I can't be bothered.
Fair enough.
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If you want to argue for the sake of it please choose another thread.
No, I genuinely thought I was providing some useful information as a counter to some stuff I was concerned was variously over-complicated and confused and wrong. Sorry I got it wrong (not least by failing to anticipate thread's reversion to pegging gags etc )
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  #118  
Old 20.01.2015, 17:58
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Re: In Need of Advice (Huge forex trading loss)

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No, I genuinely thought I was providing some useful information as a counter to some stuff I was concerned was variously over-complicated and confused and wrong. Sorry I got it wrong (not least by failing to anticipate thread's reversion to pegging gags etc )
Yep I totally agree on this point. I blame dodgeyken for this

The thread was doing just fine until he started talking about currency options which I wouldn't even dream of trying to explain on a public forum. Let alone explaining the Margin Requirements for being short them and possible delta risk scenarios along with risk associated with the rest of the other Greeks! (The name is somewhat ironic)

I think everyone is just shocked that people can lose so much money with what looks from the outset like free money. But we all know there is no free lunch.

The majority of people have never traded Forex on margin and why should they? So this is why it is very shocking indeed.
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  #119  
Old 20.01.2015, 18:09
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Re: In Need of Advice (Huge forex trading loss)

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Yep I totally agree on this point. I blame dodgeyken for this
I blame Love_Doctor for not reading my original post properly.
1) I never buy EUROs - I buy "something" (I just happen to choose values which are similar to what happened with the EUR/CHF)
2) I never said I was buying currency
3) I never said it was how the OP traded
4) I never said it was how a FOREX Trading platform was structure.
5) I never mentioned it was how an individual traded

It was an illustrated guide to how it is possible to be in debt to the tune of 4x your original amount by leveraging option.

Obviously you won't understand any of what I have just written

I'm off to buy some penny stocks - you can't lose on those
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  #120  
Old 20.01.2015, 18:36
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Re: In Need of Advice (Huge forex trading loss)

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Sorry I got it wrong (not least by failing to anticipate thread's reversion to pegging gags etc )
Could have been worse, could have been a typo, such as ....gaging pegs
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