Hedging with currency options question

[secondary]

zz

 

[Technically Fundamental]

Bear in mind I'm a newb...
Depends on the premium paid for the option. I think you'd have to weigh it up against your margin and potential profit/loss. I suppose you could work how large a position you would need to break even at the stop but how much margin would you have to put down for that?
Also this is all assuming that you don't get stuck in a range-bound market and the option expires at a loss (premium). Also I'm not sure how it would work if neither target was reached. Dunno.

Seems a bit too simple an option strat or everyone would be doing it. Looking at the price of options you should notice that the premiums are up on the otm's so thats where the smart money is. Figure how to apply the greeks to real markets using otm options and you may be on to a winner.
All IMO

 

[Martinghoul]

Hi all,

I would like to utilise currency options to hedge my trading system where I adopt a 1:1 risk/reward ratio.

Let's say for example I am buying cable at 1.70 with a stop at 1.60 and limit at 1.80.

I would obviously want to buy a put option with strike price at 1.70 and if it falls, i'd be in the money, hopefully somewhat canceling out the loss generated from the currency trade.

Is this a realistic method I can use to hedge it properly ?

Thank you.

Yes, this is often utilized by real money investors and known sometimes as a 'Protective Put strategy'. Its efficiency depends on the value of the option and the transaction costs.

 

[anley]

It's not possible as the cost of doing business will eat away ALL your profits.

Don't think you can achieve the impossible, ie only profits never losses. Remember, this is a game of risk and reward, you're paid in reward to accept risk. So if yuou reduce the risk to nothing then yes, you'll get the potential of zero reward.

Plus, to use options correctly and I mean correctly you'll have to pay your dues in that market for about 2-3 years minimum. And that means trading them everyday. Options are incredibly complex tools but at first glance they seem easy.

 

[Rhody Trader]

Let's say for example I am buying cable at 1.70 with a stop at 1.60 and limit at 1.80.

I would obviously want to buy a put option with strike price at 1.70 and if it falls, i'd be in the money, hopefully somewhat canceling out the loss generated from the currency trade.

If you buy an at-the-money put it will fully protect your downside, not partly. This is exclusive of the option's cost, however, which could be substantial. That basically means your loss will be limited to the option premium, but of course your profits will also be reduced by the option premium. It's like an insurance policy.

 

[GammaJammer]

firstly, buying the put with the same strike as where your spot position is is not necessarily the same as buying the atm puts. Usually when people talk about 'at the money' volatility in fx they're talking about atmf (at the money forward) vol, i.e. strike where the forward for the relevant date is, NOT just strike where spot is. So it depends on date, fwd points etc.

But in any case that's not all that important for this relatively simple strategy - stick the strike wherever you see fit as long as the price suits you, but beware the fact that the further away from the ats you get the more likely you're gonna have some added premium effects related to smile kicking in. And potentially skewness as well (although that could of course work in your favour rather than against you depending on what you're trading and in which direction - look at the 25 delta risk reversals for a guide).

So, as anley correctly surmises, you will be better placed to trade options if you have a slightly better understanding of how the price is derived and what factors drive it. Practical knowledge is however not always easy to gain, and lessons can be expensive by their very nature.

GJ

 

[Rhody Trader]

firstly, buying the put with the same strike as where your spot position is is not necessarily the same as buying the atm puts. Usually when people talk about 'at the money' volatility in fx they're talking about atmf (at the money forward) vol, i.e. strike where the forward for the relevant date is, NOT just strike where spot is. So it depends on date, fwd points etc.

Fair point, though much more institutional in consideration that I think is necessarily in this case. From the perspective I think the question was asked, when he says he's getting long from 1.70 and looking to buy a 1.70 put that's ATM in my book.

....you will be better placed to trade options if you have a slightly better understanding of how the price is derived and what factors drive it.

Totally agree.