I see some people talk about hedging and I really don't get it most times.
If somebody has a long position on EU and then hedges their position by opening a short position on the same pair, I think "What's the point?"
Why not just close the original position.
I really can't see the logic of holding opposite positions on the same pair as when the long position gains, the short position loses the same amount.
They are also incurring additional expenses with the double spread and possible loss on swaps if held long term.
Others may have a long position on EU and then "hedge" by opening a long position on UJ.
Is this really hedging? Isn't that just the same as holding a long position on EJ?
Now I can understand that there is probably some sense in buying an option in order to hedge your position. That way a trader can limit the downside with a position that moves against him, but without limiting the upside.
I have little knowledge about trading options and would like to know more.
Trying to locate live option costs/examples has not been easy to find.
So are there many on here that trade options?
Example:
Price of EU is 1.3400 and You are bullish, so open a long position (1 lot), targetting 1.3900
Instead of placing a SL, you buy a (put?) option that allows you to exercise the right to sell the EU at 1.3400 sometime in the future
There are 5 things that can happen?
1. The price of EU rises, but doesn't hit your target and when it gets close to the option expiry time, you close your long position and take the profit. The option expires unexercised. You win a bit on your long position, but this is offset by the associated costs of the option.
2. The EU tanks. When it gets close to option expiry time, you close your long position and take the loss. At the same time you exercise your option and take the profit. The loss on your long position is covered by your profit on the option, but it is a net loss because of the spread and costs of the option.
This means that even without a SL, you have limited your risk on this trade to the option costs and spread.
3. The EU tanks for a while and drops past where you would normally have your SL. Trading without the option in place would mean that you have lost the full amount that you risk on the trade. With the option, you have limited your loss and so can stay in the trade without a SL.
After tanking for a while, the EU rallies and your long position is in profit when it gets close to option expiry time. You close the long position, taking the profit and allow the option to lapse unexercised. Here you have taken maybe a small profit on the long position, but will have that profit offset by the option costs and spread. Probably still a lot better than simply accepting the full loss if the SL is hit.
4. The EU rallies and price hits target. You close the long position and take profits. You have won your full profit target, but have your profit offset a bit by the costs of the option and spread....
UNLESS
5. After you take profits on the long position, the EU tanks and drops below your entry price. You then exercise your option and bank extra profit.
As I have already said, my knowledge of options trading is extremely limited and maybe I am just looking at it too simplistically.
It seems that it may be feasable to trade this way when the market is experiencing wild swings that keep taking out your SL before reversing and hitting the original TP.
It may be that the costs involved in trading options is just too prohibitive?
So I would like to hear from people's experiences of trading options with some cost examples if possible.
NOTE. I am not talking about binary options.
Thank you
If somebody has a long position on EU and then hedges their position by opening a short position on the same pair, I think "What's the point?"
Why not just close the original position.
I really can't see the logic of holding opposite positions on the same pair as when the long position gains, the short position loses the same amount.
They are also incurring additional expenses with the double spread and possible loss on swaps if held long term.
Others may have a long position on EU and then "hedge" by opening a long position on UJ.
Is this really hedging? Isn't that just the same as holding a long position on EJ?
Now I can understand that there is probably some sense in buying an option in order to hedge your position. That way a trader can limit the downside with a position that moves against him, but without limiting the upside.
I have little knowledge about trading options and would like to know more.
Trying to locate live option costs/examples has not been easy to find.
So are there many on here that trade options?
Example:
Price of EU is 1.3400 and You are bullish, so open a long position (1 lot), targetting 1.3900
Instead of placing a SL, you buy a (put?) option that allows you to exercise the right to sell the EU at 1.3400 sometime in the future
There are 5 things that can happen?
1. The price of EU rises, but doesn't hit your target and when it gets close to the option expiry time, you close your long position and take the profit. The option expires unexercised. You win a bit on your long position, but this is offset by the associated costs of the option.
2. The EU tanks. When it gets close to option expiry time, you close your long position and take the loss. At the same time you exercise your option and take the profit. The loss on your long position is covered by your profit on the option, but it is a net loss because of the spread and costs of the option.
This means that even without a SL, you have limited your risk on this trade to the option costs and spread.
3. The EU tanks for a while and drops past where you would normally have your SL. Trading without the option in place would mean that you have lost the full amount that you risk on the trade. With the option, you have limited your loss and so can stay in the trade without a SL.
After tanking for a while, the EU rallies and your long position is in profit when it gets close to option expiry time. You close the long position, taking the profit and allow the option to lapse unexercised. Here you have taken maybe a small profit on the long position, but will have that profit offset by the option costs and spread. Probably still a lot better than simply accepting the full loss if the SL is hit.
4. The EU rallies and price hits target. You close the long position and take profits. You have won your full profit target, but have your profit offset a bit by the costs of the option and spread....
UNLESS
5. After you take profits on the long position, the EU tanks and drops below your entry price. You then exercise your option and bank extra profit.
As I have already said, my knowledge of options trading is extremely limited and maybe I am just looking at it too simplistically.
It seems that it may be feasable to trade this way when the market is experiencing wild swings that keep taking out your SL before reversing and hitting the original TP.
It may be that the costs involved in trading options is just too prohibitive?
So I would like to hear from people's experiences of trading options with some cost examples if possible.
NOTE. I am not talking about binary options.
Thank you
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