Hedging: I don't get it

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

very few trade fx options..... check the open interest to get an idea of how many.....

you mentioned the eurusd..... the ise symbol for spot options on the euro is EUU...... so take a look the 137's on all months.... the entire open interest is mine..... look at the 134's for all months..... the entire open interest is mine...... look at the 131's for all months...... 31 of the 33 are mine.....

i'm currently out of the bpx, aux, ndo, cdd, which are ise symbols for gbp, aud, nzd, cad...... look at the open interest on any strike price on any month.... it's probably close to 0 now........... quite often in those i will be a large precentage, if not all.....

very few trade ise fx options.... usually only a handfull of us....... there is a reason for that.....h

Hey hayseed... hope you are doing good friend.i just gotta reply here as i have been trying to PM you from few days
But you have disabled your PM's again (probably getting too many help requests )
Further i think i lost your email (i think u did gimme your email once; Kindly send again; its really difficult to contact u in private)

Posting to thank you for the vouch. Though i don't believe in vouching standards anymore, esp. lately, i mean to thank you for appreciating me in its form (for one thing or another you felt worth for). I appreciate that from someone i respect and once vouched for

Regards
ForexSaint


@thread OP Gumrai
Hedging has its own uses and is very useful depending upon trading strategies.
1 example:
Say you are a long time frame trader and like adding positions or making more pips.
You take long in a pair at Level A. It moves up to level B. But you analyse it to retrace back to level C which is between A and B.
You were not able to add positions from A to B (various reasons;market orders didn't fill; no access, etc)
Thereafter you are quite sure price wont make back to Level A but you sure that price will retrace back to level C. So you can hedge/short @ Level B for target of level C and bookout pips there and add more longs at Level C for Level D (Final target above Level B)

Of course that would require skill and conviction of your analysis but would earn more pips than usual one directional trading, given the fact that rarely pairs never retrace.

Hi Gumbai.
Yea, would be interesting to know more from people with experience in options. I don't have any.
Actually would be interesting to know if some kind of arbitrage is possible.


Regarding your post, Forex Saint is right. For some strategies is a must.
There is no double spread. Yes, a bit of interest but not worth worry for. That happens with any currency you
hold overnight not just the ones you are holding both currencies of the symbol .

We can buy both currencies of any symbol. I mean we can buy euros
(buy the symbol eur/usd) or buy dollars ( sell the symbol) and hold them both until we decide to sell them at a good price. There is no difference then buying any other currency of another symbol.

To me, selling at a loss, and later at some point on time open a position in the same direction ( don't we all do that often?) make less sense.

J.

hey saint...... sent it to ya......h

//----
//----

hey jeuro...... take a look at the open interest in ise fx options on any currency and ask yourself why it's so low......

the answer should be obvious.......h

Hi Hayseed,
I wouldn't know where to look for open interest in FX Options. I'm guessing that you mean a list of what options people are trading.

In fact, I'm finding it difficult to access much info about current prices without opening an account, I don't really want to do that.
I've been looking at Saxo website

From what I can gather, using EU as an example, it will cost about 120 pips to buy an option, I think that is for a 30 day option. Obviously the further away the expiration date is, the more expensive it is in pip terms.
There is also about a 7 to 10 pip spread which will come into play if cashing out before expiration.
I have no idea whether there are any commission charges as well as the pip cost.
Seems quite expensive, but I realise that anything less than that and traders would simply straddle the strike with a call and a put and hope for a big move in either direction. With 125 pips cost per option, price would have to move 250 pips before any profit could be made.

I will investigate the possibilities a bit more.
Maybe I will have to open a demo account to see the big picture.

hey gumrai..... open interest is the total number of contracts currently open...... any good site that gives fx option quotes should show all open interest..... such as etrade below.....

look at all strike prices on all months on all the symbols for fx options...... bpx, aux, ndo, cdd, which are ise symbols for gbp, aud, nzd, cad......

as example, below is the eurusd for december...... those 26 below are mine.....

do you really want to trade against so few traders..... it's a rough game......h

Hi Hayseed,
I accessed the etrade website but couldn't find anything like the screenshot that you have kindly posted.
Probably have to log in first, I guess.
Yes, trading looks pretty thin on the ground.
Sorry about my questions, but I am interested to know and understand more.
I'm assuming that you bought the December 1.3400 puts sometime in the past
If buying them now, they would cost 4.30 per contract, which means that the underlying price has to drop below 1.2970 before you could realise a profit if allowing it to run to expiration.
The question is, does the Bid and Ask move in tandem with the underlying price?
Ie. If you buy the puts at 4.30 today and price drops by 100 pips, would the bid price also increase by 100? So go from 4.15 to 5.15 enabling you to cash out with a 0.85 profit?
Or is it a case of if there are few buyers, you find that you don't benefit by the full amount?
I note that under the "Last" column, price is only 3.50, but that could be from some time back (when you bought your contracts?)

If I would be trading options, I doubt that I would be looking at such long contracts.
Could I be a pain and ask if you could post a screenshot of of 30 day options open interest?

Thanks for being so helpful, it is appreciated

Hi FS,
In your example, I see no difference than if simply closing your long at level B and then opening a new long position at level C.
But I can see that if your scenario didn't play out the way you expect. Ie price didn't retrace and "Hedge" trade hits SL, you would still want to be in the long trade.
So I understand a little more, Thanks

Mind boggling Trade Explorer BTW

I accessed the etrade website but couldn't find anything like the screenshot that you have kindly posted.

hey gumrai..... yes, that last price, 3.5, paid was me..... it will stand untill another trade is placed.....

this link might not work..... euu options.....

the bid ask should move in tandem..... in very low volume options they might not.....

roughly speakin for in the money options , your 0.85 profit scenario is correct..... which would be 85$.....

//----

forex is a piece of cake compared to fx options..... study on it real hard first.... if you decide to jump in, bring a big knife.....h

Thanks Hayseed,
That link works fine. I don't know why I was unable to gind my way to it.
I'm not about to jump into anything just yet.
Just looking for info.

Thanks very much, you're a star.

Why there is no difference? One got to earn from retrace move from Level B to C rather than simply holding on to your earlier long at level A & waiting for a pair to move (in cases of low ranges)
Further if you were unsure of the pair's move in any direction after level B, you actually locked in profits by hedging (using equal sized position) & can resume your trading booking out longs or shorts when you have conviction about the next move.
Further if due to some reasons you are unsure about managing a trade (urgency or anything), you can again hedge.
There are many more uses, depending upon what conditions your broker has about hedging & whats your strategy like.

&
FYI in that "Mind boggling Trade Explorer" you are talking about, earlier on, i did use hedging to grow up that kid, helping in maximizing "effective" margin.


P.S.
Of course keep in mind though, that when i talk about this kind of hedging, its for liquid pairs with realistic spreads and not for instruments which will f**k both long and short positions out due to spread widening (actual or broker-screwing)

Gumrai is right there is no difference at all. When you short against your long with same lot size, you only freeze the PnL of the position. Your net position is 0 lots. You virtually close the long. The profit you believe banking with the short is actually lost by the long side (the trade PnL is frozen). By simply closing the long you somewhat already bank the future retracement with no risk since you're no longer in the market. When price reaches C you can reopen the long with a SL as far as at the original price A because the trade is already profitable of B-C pips.

BTW you don't affect the margin either. The closed position uses no margin, exactly like the hedge.

@Gumrai,
The only usefulness I found for having a short and a long open at the same time on the same instrument is to trade several systems at the same time. If the net position size can always be simplified to one net position, that's not true for the SL. You certainly don't want to bother managing manually the individual SL by increasing/decreasing the net position size. Plus you may lose Internet connectivity for several hours leaving a net position with no hard stop...

//---

hey gumrai..... by coincidence the euu has now moved down 100..... you can see the price has not followed equally..... had there been hundreds of active traders involved here, the price would move almost cent for cent.....

but there are only 2 players..... a hayseed and a market maker..... two men enter..... one man leave.....h

Thanks Hayseed,
Quite surprising that the underlying price changed by 100, but the option only by 45.
This indicates that cashing out early will not necessarily yield the full potential benefit, very useful to know.
Will need to do some checking to see if they are more in sync when the expiry time is closer.

^^This. I still don't understand how it can be so difficult for some people to grasp this. Opening a trade of the same volume of the same pair in the opposite direction is the same as closing the trade....except you pay more.