Hedging using a combination of indices/binaries


Senior member
I just want to throw a trading idea into the melting pot to see what you think and to get others to throw in their ideas.

I'm currently looking at binary betting and using a cash index position to hedge out the binary e.g.

Assume morning the FTSE was standing at -15 points down on yesterdays close, and I reckoned the index would stay in negative territory for the rest of the day. So I take out a binary bet £5 a point for the index to end the day down. The level I open at is 68.2 (figure taken from this morning)

Next I hedge this with a long position on the FTSE cash at £22 per point (Max loss of 68.2x£5 / 15 points until the binary expires at 0) and a stoploss at 7 points below open. (that's 15*31.8/68.2)

With this total position we have the following scenario...

Index finishes above yesterdays close: The binary expires at 0, loss of £341 but the FTSE cash position makes a profit > £330 : Overall profit
Index finishes at yesterdaays close: The binary expires at 0, loss of £341 and the FTSE cash makes a profit of 15*£24 = £330 : Small £11 loss
Index finishes between yesterdays close and -15 points, Binary expires with a profit of £159, and the FTSE cash makes a profit of between £0 and £330
Index finishes between -15 and -22 points (assume stop not taken out) - Binary expires with profit of £159 and FTSE makes loss of up to £154 - min £5 profit
Index finishes negative and stop taken out - Binary +£159 and FTSE cash £-154 : +£5 profit

As you can see there is little downside to the trade (in the perfect world). But I think the 7 point stoploss on the FTSE cash is too close and would most likely get taken out. So it may be worth reducing the FTSE bet size so that you can increase the stoploss to the detriment of the profits if the FTSE was to surge upwards - but given the index is already down it's most likely to stay down for the rest of the day.

Also this trade assumes that if the stop at -22 points is taken out then it's most likely that the index will end the day negative - otherwise it will result in a heavy loss!

So any ideas or alternatives? I've been looking at using 10 point range bets and tunnels but not come up with a more workable alternative yet.