Protective of Puts

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Alternative to Forex Overlays are a great way to manage the risks and benefits of trading the same subject to upside risks. The options are broad topic so I’m just not the same concept to discuss in this article, and then followed by another article second overlay strategy. One of the trading systems used option overlays, and you can follow every month to see how this strategy actually performs in real time. I’m talking about two concepts are very general and can be performed easily and without constant maintenance. These are two things I want to find the system so I do not, it makes all the mistakes the first time, and I have a life together with my forex trading. I’m going to make a protective cover of this report and covers the calls to the next.
Protective Put
Set the option of three parts. The first is a contract. If you buy a put, you buy the right one of the underlying currency at a fixed price specified period to sell. You could buy a put, sell a lot of today was the GBP / USD $ 2.0000 at any time between now and the date you choose in the future. If the currency pair falls to 1.9900, you can still sell it to 2.0000 and take profit. In fact, it does not matter how much the currency falls. If it still has its own time-window, you can sell the currency of 2.0000 according to your wishes. Set a price (2.0000), which you have chosen, your contract is known as the redemption price. The second part is the time. The options are available in monthly increments. So you can buy one that is good until the next month or 12 months. The choice is yours. Finally, the options cost money. Prices of the option as a bonus. Premium is higher than the more valuable options. Option in the long run, and a large base price is more expensive than the one of the very short term and uncertain redemption price. I think the best way to explain this is to use an example.
Example 1:
Suppose that 22 January 2007, they wanted an agreement on the GBP / USD to buy.Suppose it was the price of 1.9750. They are a market economy investor and you want to buy some protection against the risk of the market shows a protective, you may terminate this Agreement at any time sell 1.9750 before the contract expires. In this case, the contract expired a month later, on the third Friday the 16th February. It will cost you 150 points per contract taken. A couple of 1.9502 later dropped. In this case, the case will still be worth 248 points, because you can not sell itself, the element 1.9750 (1.9750 to 1.9502 = 0.0248). Only the amount you would have lost, you were long, so they wash each other out. In fact, the only thing you pay by 150 points, you buy the contract first. You do not need to put a stop, because you were fully protected. Although the value decreased significantly, more than 150 points, which you had planned, we had to hedge capital protected.
Example 2:
Month following the trade in February-March, would, if another loss, but the March-April trade was a winner. In order to trade in March-April, you could buy a long position in a currency pair to 1.9372. You are in a position to your site with an estimated 1.9350, that would have cost you 120 points, so that you can meet with some of the exposure from 1.9350 to 1.9372. However, if you add these two positions, you had a comprehensive risk similar to what you had during the January-February trade. During the month of your long position rose sharply to 2.0027. That means you made 655 points. What to put? Well, there is no way how to sell this set would be 1.9350, so you can just let the put expires worthless. It reduces the amount of profits that pay you to the new size of the net profit of 535 points can be set.
This strategy may seem a little complicated, but it’s worth more to learn, because it offers significant advantages. Institutional traders use option overlays, such as a protective layer down all the time. It helps mitigate risk and total cost volatility of your portfolio. Here are some other advantages and two disadvantages of this strategy.
Benefit # 1 Non-stop
You do not need a waypoint long foreign exchange position. How many times have you been right under your leadership, but got stopped out of the market whipsaw? I am sure that this happens, most currency traders on a regular basis. The protective put, you are responsible and can give the exchange rate to fall to zero, if possible, without the maximum loss. Otherwise, this advantage is also true during the announcements. You are now under control.
Benefit # 2 Unlimited on the head
Unlike many hedging strategies, yet this technique allows an unlimited head. Although the gains are set by the price netted profits can still be important.
Benefit # 3, the lower the volatility of your portfolio
The total portfolio is less volatile, because the downside is limited. This is an example. I’m going to assume that prices and volatility is relatively constant, on average over the last 10 years, and that the strategy is to have a long position on the GBP / USD and money to the size of the portfolio weight of 20:1 Put buy. It was back to 10 percent per year during this period. If you combine this interest, some careful analysis, it is quite possible to see a much better return than that.
Con # 1 – put the cost of
Insert costs 150 points, if it is executed until the last day of each month, whether the market goes up or down. This is the price that you eat on its head, creating a pre-reverse. Even if the market falls below 150 points, the biggest loss is the same.
Con # 2 – the cost of trade
If you buy a put, you pay to the Commission. The Commission has the prices all the time, this is nominally in control, but there is another PIP before the trading losses of each month.
The hardest thing for most investors do to protect the capital. You are a successful individual investors often hear that if you effectively protect your capital gains will take care of. I agree with this view, and use protective clothing is to give me an advantage. This keep a model portfolio of businesses which option overlays used to represent the concept in real time. Log-in and check it out, what we up to, and what it does over time.


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