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hedging Forex with options

  • #1
  • First Post: Dec 1, 2019 9:55am Dec 1, 2019 9:55am
Hi

i'm still looking for a way to protect trading against sudden moves that won't trigger the SL because of low liquidity.
I've looked into asymmetrical hedging, but got not luck with it and as far as i understood, risk can be reduced but not canceled. And if you hedge, you disminish profits, so i'm not sure about this one.

But i recently discovered that you can protect trades with options : for instance you are on a buy on GBPUSD at 1.30 and you put a put option at strike 1.20. if the price crashes down, you can use your right to sell GBPUSD at 1.20, thus limiting the risk and not crashing your whole account.

There is one thing i'm not sure about, though, because most of the time, the strike price won't be hit of course so you'll have to pay premium.
How does it work in real life trading ? how expensive if the premium ? I have trouble finding that info.
I suppose that the higher the timeframe, the less you'll pay ? because you'll trade less but will get higher returns ?
Also the farther the strike price the cheaper the option price ? so it's better once again to use higher TF ?

I'm a newbie guys but i'm trying to understand this.

thanks

Jeff
  • #2
  • Dec 1, 2019 11:13am Dec 1, 2019 11:13am
Hi ionone,
You are conceptually correct, options are a theoretically very logical way of protecting against the risk of an adverse move to your position without having to actually dispose of the position. The single biggest problem with this is the cost of the option. The premium is high and the bid-offer spread tends to be wide, in short it is expensive protection.

I have looked at this idea many times and I can never make it stack up as feasible because of these costs. Just run through some theoretical examples using quoted option prices and you'll get the idea. I've found the best solution is simply to have a stop and respect it. If your position is knocked out on a spike, just smile and take it, it'll be cheaper protection overall than the options route. If it keeps happening, pick another market that is more liquid and with less spikes!

NB If you want to get more technical about it, a further problem is that the option price does not generally move in a 1:1 relationship with price changes for the underlying. This is the delta of an option and you'll need to take this into account also if you really want to do option hedging. Sadly, it's not quite as simple in practice as in concept. I really suggest you learn more about options as a subject before attempting this.

Hope at least some of that may help
  • #3
  • Edited 12:26pm Dec 1, 2019 11:36am | Edited 12:26pm
Nonsence .... if any can do at option what have to leveraging with forex vs versa ...
these is wot happen when read too much the blind , the mute , and the def ....
been said dacade back read your charts ....
plan your trade ....
apply money management ... simple way dont need biggy ...
h1 will take you @ lease 4 years to understand 4 h gonna drag you to 16 years ...
now the market preety much side way and lost its volatility ... use to moove
used to 80 .. 100 pips now 60 pips even 30 pips ... any strategy will work well the tail keep feeding the horn
and trader can do these .... selll after selll buy ... after buy .. sell again ...
some those day are ... solong shasha ...
the original plan is every acct has to be F up every 1/4 ... that whay they have 1/4 report ...
so if any try to delay the f up 1/4 start to use healty mm ...
find which market hour is good ... aus , frank , london, usa ...
smaller tf lower sl ... bigger .. well biggy
all no magic ....
  • #4
  • Dec 1, 2019 11:51am Dec 1, 2019 11:51am
the comparizon of ....
the mute...
the bline ....
the def ....
all is master guru ....
those who fagot to take the responsibility ... of its own action ...
is thats wot it is ....
Attached Image(s) (click to enlarge)
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Click to Enlarge Name: GBPUSDH4 2.png Size: 101 KB
Click to Enlarge Name: GBPUSDH4 3.png Size: 89 KB
Click to Enlarge Name: XAUUSDH4 1.png Size: 70 KB
  • #5
  • Dec 1, 2019 12:23pm Dec 1, 2019 12:23pm
Instead buy both put and call same strike price. (ATM). And get rid of swap. You will get the same results i think.

Where do you trade currency options?
  • #6
  • Dec 2, 2019 3:14am Dec 2, 2019 3:14am
Quoting Oldtraderman
If your position is knocked out on a spike, just smile and take it, it'll be cheaper protection overall than the options route. If it keeps happening, pick another market that is more liquid and with less spikes!
the problem is not spikes, but rather whole crashes like Brexit where you can lose ALL your money and MORE.
maybe guarateed SL would be a better choice/cheaper ?
  • #7
  • Dec 2, 2019 3:14am Dec 2, 2019 3:14am
Quoting Dumani
Instead buy both put and call same strike price. (ATM). And get rid of swap. You will get the same results i think. Where do you trade currency options?
are you talking about options or CFDs ? and the long swap is usually differenty from the short swap so it won't work
  • #8
  • Dec 2, 2019 3:28am Dec 2, 2019 3:28am
Quoting ionone
{quote} are you talking about options or CFDs ? and the long swap is usually differenty from the short swap so it won't work
I mean you may pay lots of money to swaps. Instead you can do this with options itself. buy both call and put options same ATM price. I don't think you are going to make a lot of money but as your loss is limited and wins are unlimited, you can make some money with monthly options. Remember time decay is against you in this case.
  • #9
  • Dec 2, 2019 4:36am Dec 2, 2019 4:36am
Quoting Dumani
{quote} I mean you may pay lots of money to swaps. Instead you can do this with options itself. buy both call and put options same ATM price. I don't think you are going to make a lot of money but as your loss is limited and wins are unlimited, you can make some money with monthly options. Remember time decay is against you in this case.
are you talking about a "straddle" strategy ? this might be a good option when times of uncertainty but you gotta be sure it's gonna crash, or you'll lose money.
and it doesn't protect "regular" trading times when you don't know if a crash will happen or not.

let me know if i'm on point.

Jeff
  • #10
  • Dec 2, 2019 4:39am Dec 2, 2019 4:39am
Quoting ionone
{quote} are you talking about a "straddle" strategy ? this might be a good option when times of uncertainty but you gotta be sure it's gonna crash, or you'll lose money. and it doesn't protect "regular" trading times when you don't know if a crash will happen or not. let me know if i'm on point. Jeff
Exactly however isn't it the same thing ? Instead of long at forex and buy puts at options, you can use straddle? I might be wrong but just wondering.
  • #11
  • Dec 2, 2019 7:45am Dec 2, 2019 7:45am
Quoting ionone
{quote} the problem is not spikes, but rather whole crashes like Brexit where you can lose ALL your money and MORE. maybe guarateed SL would be a better choice/cheaper ?
Hi ionone,
A regular firm stop resting with your broker as a stop/limit market order will close your position at the best available dealing price from when the stop level is hit. If your market is prone to massive crashes through a level and so your closes suffer from massive slippage then, yes, a guaranteed stop if offered by your broker may be a viable alternative. They generally cost only a bit more than a regular stop but, that said, for most market conditions in most markets a regular stop works just fine, so why pay the guarantee premium?

If you are always getting big negative slippage I'd perhaps look first to change broker or change markets. There is generally no need in my experience to especially need guaranteed stops unless something is either amiss with the broker or the market is super volatile for exceptional resasons at that moment - and then that would be the rarity, not the norm being faced.
  • #12
  • Dec 2, 2019 8:13am Dec 2, 2019 8:13am
Quoting Oldtraderman
{quote} Hi ionone, A regular firm stop resting with your broker as a stop/limit market order will close your position at the best available dealing price from when the stop level is hit. If your market is prone to massive crashes through a level and so your closes suffer from massive slippage then, yes, a guaranteed stop if offered by your broker may be a viable alternative. They generally cost only a bit more than a regular stop but, that said, for most market conditions in most markets a regular stop works just fine, so why pay the guarantee premium?...
i'm not concerned about slippage : if i was i would simply trade higher timeframes.
I'm concerned about massive crashes that happens within seconds and which no order is filed because of low liquidity. I'm concerned about preserving the whole capital. Don't get me wrong i don't got thousands, but i gotta think smartly and consider that maybe one day ill have a big account,or will trade for someone else money,
what then ? i have to prepare for this, and create the safest strategy possible
  • #13
  • Dec 2, 2019 8:58am Dec 2, 2019 8:58am
Quoting ionone
{quote} i'm not concerned about slippage : if i was i would simply trade higher timeframes. I'm concerned about massive crashes that happens within seconds and which no order is filed because of low liquidity. I'm concerned about preserving the whole capital. Don't get me wrong i don't got thousands, but i gotta think smartly and consider that maybe one day ill have a big account,or will trade for someone else money, what then ? i have to prepare for this, and create the safest strategy possible
Hi ionone,
I see where you're coming from here. For that, I think you were correct last time, guaranteed stops might be the simple and comparatively cost effective way of removing this kind of risk at the moment for you, though on most occasions you will be paying the guarantee premium without needing it so it will be a small constant drag on your returns. You have to pay for insurance!

If in time you do get to play with serious money, at institutional sized positions simple guaranteed stops are not available and most big funds just accept the market risk as a cost of business. They do try to mitigate this by sticking to liquid, active markets where what you describe is pretty rare and they can generally get out damaged but not fatally so if caught; and/or by getting out of the market altogether when conditions get too volatile for their risk tolerances; and/or by accepting the cost of options/futures hedging as being justified given the heightened risk in such conditions.

I admire your ambition, best of luck!
  • #14
  • Last Post: Sep 28, 2021 3:51am Sep 28, 2021 3:51am
Quoting ionone
Hi i'm still looking for a way to protect trading against sudden moves that won't trigger the SL because of low liquidity. I've looked into asymmetrical hedging, but got not luck with it and as far as i understood, risk can be reduced but not canceled. And if you hedge, you disminish profits, so i'm not sure about this one. But i recently discovered that you can protect trades with options : for instance you are on a buy on GBPUSD at 1.30 and you put a put option at strike 1.20. if the price crashes down, you can use your right to sell GBPUSD at...
Hi, how is your progress with options going? I am also looking at this.

Cheers
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