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Hedging

Trade Idea (Hedge): SPY July 16th 416/2 x 432 Put Ratio/ZebraPictured here is a July 16th 416/432 Put Ratio with twice the number of contracts on the long side as on the short which I can either do as a standalone directional shot or (in this particular case) a hedge against a portfolio that is longer than the net delta of this particular setup. Here's how it's constructed: Start out by (a) looking to buy 2 x (or some multiple thereof) the 75 delta long put in the expiry in which you want to erect your hedge and selling the at the money put, which should be around 50 long delta. The initial result of this setup from a delta standpoint should be: (2 x -75 delta) - 50 delta = 100 short delta. You can proceed to fiddle with which strikes you want to buy such that your break even is at or slightly above where the underlying is currently trading. This is to ensure that you're not paying more than you have to, as well as to ensure that the extrinsic in the short put pays for all of the extrinsic in the longs -- hence, the clever nickname for this ssetup: the Zero Extrinsic Back RAtio or "Zebra." The end result: Max Loss: 29.71 Max Profit (Theoretical): 418.29 (Assuming the Underlying Goes to Zero) Delta: -89.52 Dynamic Break Even: 417.15 versus 416.74 Spot Ordinarily, I look at ratios in two pieces, the first being the long put vertical consisting of the short put and one contract of the long; the second, the "extra" long. Max profit is realized in the long put vertical aspect on a finish below the short put strike. From a trade management standpoint, I generally opt to take this aspect off at or near max, which in this case would be something a little short of 16.00 (the width of the spread) and then either (a) allow the remaining long put to ride; or (b) sell another at-the-money short put, converting the ratio into a static, standalone spread to protect myself against a whipsaw back up into the remaining long put strike. There is, after all, little point in keeping the long put vertical aspect on after it has converged on max because you won't can't make anything more on it (but can naturally still lose money on it).
AMEX:SPY
by NaughtyPines
4
Best Pairs to Hedge if you have an American Trading Account.This is just a quick video in response to a question a friend of mine had and so I thought I'd share my response to him with everyone else. If anyone has any questions about advanced trading, feel free to drop me a line and let's chat. ------------------------- Please don't forget to FOLLOW, LIKE, and COMMENT ... If you like my analysis:) Trade Safe - Trade Well Regards, Michael Harding 😎 Chief Technical Strategist @ LEFTURN Inc. RISK DISCLAIMER Information and opinions contained with this post are for educational purposes and do not constitute trading recommendations. Trading Forex on margin carries a high level of risk and may not be suitable for all investors. Before deciding to invest in Forex you should consider your knowledge, investment objectives, and your risk appetite. Only trade/invest with funds you can afford to lose.
by Michael_Harding
6
IF everything melts down, this is our plan.- We are observing signals of a possible bearish movement. Yesterday we saw strong selling power on the market, and due to the current situation, we want to be ready for hedging in case of a 14 - 15 % bearish movement. We are not saying that a short impulse will happen. The idea of this post is to have a strategy in case we have this type of situation. -Which is the plan? IF the price goes below the red line, we will short the index using S&P500 micro futures (ticker MES), and we will set our stop loss above the current impulse. Break-Even on the next horizontal line. Target on the Lower support zone you can see on the chart. -When you buy or sell a Micro S&P500 Futures contract, you are getting exposure to a 12.500USD position on the Index. You can take this type of position as a Hedging strategy (imagine you are opened on the market for 12.500USD (on stocks), if you sell the index and the price reaches the target, you protected your portfolio from that loss. -What happens if your order is executed and the stop loss is reached? You can consider the loss as insurance you pay for protecting your portfolio (-600USD more or less) -Also, this type of movement can be taken as a normal trade risking a fixed % of the capital (Remember it's very wise not to risk more than 1% of the capital on any given trade) -And finally, if the price keeps going up, and the short order is never executed, then you didn't risk anything, and everything keeps going as normal. Use this as an informational post; we are not providing any advice here; you should take your own decisions on the market. Thanks for reading!
U
by ThinkingAntsOk
4
HEX Token Gamma ChartHello, HEX token has a daily pump that comes from decentralized exchanges that swap other cryptocurrencies for HEX in order to meet the expected price for its stakers. On days where more investor stakes are ending, there will be larger buys--sometimes in the 10's of millions of dollars worth of ETH. This chart tells you optimal times to buy HEX throughout the day, based upon their deviations from VWAP. ANYTIME that HEX drops into the 2nd or 3rd deviations, decentralized exchanges are forced to use it more due to liquidity pairings. In otherwords---anytime is a good time to buy HEX and stake, because it's the only TRUE deflationary cryptocurrency. Bitcoin is going to rapidly inflate this year because of this reason as well. You can use HEX to hedge your position on ANY stock investment too, because it has gamma that is (more or less) the inverse of Bitcoin. Hope this helps!
HLong
by projectexa
1
CORRELATION,DIVERSIFYING & HEDGING: An elementary viewGreetings In the world of forex trading or trading of any financial instrument for that matter, many complex, technical and convoluted words are thrown around in conversations. Such jargon, though is relevant, tends to result in many blank stares especially among some of my peers, many of whom are not finance, economics or statistic fundi's. Many of them with basic education, yearn to be part of these conversations and also contribute their own opinions. This leads to many of them simply offering that awkward nod, wide smile and occasional laugh when everyone else does. they are relegated to conversation observers who's feet seem stuck to the floor. I've been there and that feeling is gut-wrenching, degrading and leads you to view the rest of the crowd as snobs, elitists or braggarts. this then creates apathy toward the subject matter. Well i will try, through this article, to open one of the many back doors to this world. I will attempt to unwrap and "break it down" to bite size chunks so that maybe one day when you are in the midst of the so called "esteemed highbrows", you will also throw in your "two cents". This article will explore the concept of correlation trading. Correlation can also be viewed as the interconnection, interdependence, association or link between. So correlation trading (especially in forex), is basically a statistical measure of the relationship (or association or interdependence) of currency pairs. A simplified example would be if you take the AUDJPY pair. This pair is an association or link-between the AUDUSD and the USDJPY . It would stand to argue that the AUDJPY pair is "correlated" to the AUDUSD and USDJPY. A negative correlation implies that the currency pairs will move in opposing directions while positive correlations tend to move in the same direction. Negative correlated pairs are usually used for hedging purposes. Correlation coefficients range from-1 to +1. A correlation of -1 implies that the two currency pairs will move in opposite directions every time and vice versa if the coefficient is +1. In the past, at this stage of the conversation, I would have switched off looking for how to exit the group, but read further as we further dissect this further. What i have come to appreciate is that you don't have to fully get it the first time, but it will make sense as you progress. So correlations are usually tabulated and presented in different date ranges, namely daily, weekly, monthly, 6 monthly and yearly. A simple example of the EURUSD against USDJPY pair would look like: DAILY +0.44 WEEKLY -0.42 MONTHLY -0.34 6 MONTHLY -0.55 YEARLY -0.85 interpretation Over a period of one year the EURUSD had a strong negative correlation against the USDJPY , meaning that 85% of the time when the EURUSD went up the USDJPY went down. Conversely over the daily time period these pairs were positively correlated. This example was also deliberately drawn up to show the correlations do not always remain the same over time. From the example the effects BREXIT might cause the temporary positive correlation on the daily time range among many other economic factors taking place in Japan. SHOW ME HOW TO MAKE FROM THIS!!! Now we have some understanding of correlation in forex pairs, here's how the "mashed potatoes mixes with the gravy". We know that the EURZAR and the USDZAR have a very strong positive correlation(I am biased on ZAR: South African Rand since i'm the mother continent), so trading trading on both pairs might not be advisable as it simply doubles your exposure. For instance you buy 1 lot of EURZAR and the same on USDZAR , knowing that these pairs are likely to move in the same direction, will simply double the chances of you losing more if the trade goes against you and vice versa. Lets say you try to get a "one up" on the market like what i tried to do when I started trading by going long on EURZAR and short on USDZAR at the same time. Well my friend that is a contra-trade (a trade that cancels the other) and most of the time you will end in a loss. You might be asking how you will end in a loss if the trades cancel out each other, well firstly these pairs don't always move in the same exact pip range (because they are not 100% correlated) and they have different pip values. Trust me the math doesn't lie, I won't go into it i might lose you at this point. However pairs that are negatively correlated to the EURZAR like the ZARJPY should not take an opposite position. Since we know that when the EURZAR goes up the ZARJPY goes down. So buying (or going long on) EURZAR and selling (or going short on) ZARJPY is the same as buying two position of EURZAR . In other words we have doubled our risk. Some people might say well that the disadvantages stated above can also be utilised to our benefit if we know how to hedge our trades and also bring in diversification. Now this conversation is the one where we graduate to the master class of the inner circle of trading pro's. a friend approached me and enlightened me to the fact you can also diversify your trading portfolio, especially if you have a directional bias on a particular pair. Say, for example, you believe that the ZAR is entering a bullish season, you can diversify by putting a buy(going long) on EURZAR and USDZAR knowing fully well that the American economy has a different bias than the European monetary authorities, therefore by spreading risk between EURZAR and USDZAR will lower losses if the USD goes in the opposite direction quickly, allowing you to adjust your portfolio. This learned friend of mine went on to explain that for pairs that are negatively correlated, like the EURZAR and the ZARJPY can be used for hedging purposes through the use of the different pip values ( PIP is the smallest move in the price of a currency pair). Hedging is the opening of a position with the purpose of offsetting any gain or loss on the other transaction. Assume the value of the pip move in EURZAR is $10 for a lot of 100,000 and the value of a pip move in ZARJPY is $8 or a lot of 100,000. Knowing this can help us hedge our exposure to EURZAR . (Please be aware that certain countries do not allow hedging) Let say i open a position of 1 short EURZAR lot of 100,000 units and 1 short ZARJPY lot of 100,000 units. When the EURZAR increases by 10 pips, the 1 would in a loss of $100 (number of PIPs X Value per PIP). However, since ZARJPY moves opposite to the EURZAR , the short ZARJPY position would be profitable, nearly up to $80 (this is due to the strong negative correlation). This would turn the net loss of the portfolio into just -$20 instead of the full $100. On the flip side this hedge also means smaller profits in the event of a rally down in EURZAR . However, in the worst-case scenario, losses become relatively lower. CONCLUSION All traders regardless at which stage you are, from novice to grand-master, there is need to have an appreciation of correlations and how they affect your portfolio. work towards: 1.Eliminating contra-trades (Trades that cancel each other out) 2.Diversify Risk. By not putting your eggs in one basket. By taking advantage of the imperfect correlations, one can open two positions in the same direction knowing that you limit your exposure to one pair. 3. Potentially double up on profits. In our example above, the high correlation between EURZAR and USDZAR , would mean that if you open a position one of the pairs you can open a similar position on the other pairs thus potentially doubling profits and vice versa. 4. Hedging. This usually results in lower profits, but it also minimises your losses. 5. Confirm break outs and avoid fake outs. Although I did not discuss this aspect in this article, it is the very topic that will be in my next article that i will be releasing next and will sure be topic that will result in all those finance and economics gurus offering you a 2 minute attentive silence, as they nod their heads to your insightful analysis of the markets. You might even get a "let's chat later privately and explore this in depth, or that's exactly what i was about to say". This will leave you walking a little taller, with a bounce in your step, calling shots. All i am saying is if i can do this, surely you can too. Takunda Mudenge is a market analyst based out of Zimbabwe, Africa. He writes in his personal capacity and the information is purely for educational and entertainment purposes and should not be construed or assumed to be investment advice. The information above was collected from various investment websites and literature and all attempts were made to make it into contemporary English.
Education
by takundamudenge
1
Correlation, diversifying & hedging : An elementary viewOANDA:EURZAR Greetings In the world of forex trading or trading of any financial instrument for that matter, many complex, technical and convoluted words are thrown around in conversations. Such jargon, though is relevant, tends to result in many blank stares especially among some of my peers, many of whom are not finance, economics or statistic fundi's. Many of them with basic education, yearn to be part of these conversations and also contribute their own opinions. This leads to many of them simply offering that awkward nod, wide smile and occasional laugh when everyone else does. they are relegated to conversation observers who's feet seem stuck to the floor. I've been there and that feeling is gut-wrenching, degrading and leads you to view the rest of the crowd as snobs, elitists or braggarts. this then creates apathy toward the subject matter. Well i will try, through this article, to open one of the many back doors to this world. I will attempt to unwrap and "break it down" to bite size chunks so that maybe one day when you are in the midst of the so called "esteemed highbrows", you will also throw in your "two cents". This article will explore the concept of correlation trading. Correlation can also be viewed as the interconnection, interdependence, association or link between. So correlation trading (especially in forex), is basically a statistical measure of the relationship (or association or interdependence) of currency pairs. A simplified example would be if you take the AUDJPY pair. This pair is an association or link-between the AUDUSD and the USDJPY. It would stand to argue that the AUDJPY pair is "correlated" to the AUDUSD and USDJPY. A negative correlation implies that the currency pairs will move in opposing directions while positive correlations tend to move in the same direction. Negative correlated pairs are usually used for hedging purposes. Correlation coefficients range from-1 to +1. A correlation of -1 implies that the two currency pairs will move in opposite directions every time and vice versa if the coefficient is +1. In the past, at this stage of the conversation, I would have switched off looking for how to exit the group, but read further as we further dissect this further. What i have come to appreciate is that you don't have to fully get it the first time, but it will make sense as you progress. So correlations are usually tabulated and presented in different date ranges, namely daily, weekly, monthly, 6 monthly and yearly. A simple example of the EURUSD against USDJPY pair would look like: DAILY +0.44 WEEKLY -0.42 MONTHLY -0.34 6 MONTHLY -0.55 YEARLY -0.85 interpretation Over a period of one year the EURUSD had a strong negative correlation against the USDJPY, meaning that 85% of the time when the EURUSD went up the USDJPY went down. Conversely over the daily time period these pairs were positively correlated. This example was also deliberately drawn up to show the correlations do not always remain the same over time. From the example the effects BREXIT might cause the temporary positive correlation on the daily time range among many other economic factors taking place in Japan. SHOW ME HOW TO MAKE FROM THIS! Now we have some understanding of correlation in forex pairs, here's how the "mashed potatoes mixes with the gravy". We know that the EURZAR and the USDZAR have a very strong positive correlation(I am biased on ZAR: South African Rand since i'm the mother continent), so trading trading on both pairs might not be advisable as it simply doubles your exposure. For instance you buy 1 lot of EURZAR and the same on USDZAR, knowing that these pairs are likely to move in the same direction, will simply double the chances of you losing more if the trade goes against you and vice versa. Lets say you try to get a "one up" on the market like what i tried to do when I started trading by going long on EURZAR and short on USDZAR at the same time. Well my friend that is a contra-trade (a trade that cancels the other) and most of the time you will end in a loss. You might be asking how you will end in a loss if the trades cancel out each other, well firstly these pairs don't always move in the same exact pip range (because they are not 100% correlated) and they have different pip values. Trust me the math doesn't lie, I won't go into it i might lose you at this point. However pairs that are negatively correlated to the EURZAR like the ZARJPY should not take an opposite position. Since we know that when the EURZAR goes up the ZARJPY goes down. So buying (or going long on) EURZAR and selling (or going short on) ZARJPY is the same as buying two position of EURZAR. In other words we have doubled our risk. Some people might say well that the disadvantages stated above can also be utilised to our benefit if we know how to hedge our trades and also bring in diversification. Now this conversation is the one where we graduate to the master class of the inner circle of trading pro's. a friend approached me and enlightened me to the fact you can also diversify your trading portfolio, especially if you have a directional bias on a particular pair. Say, for example, you believe that the ZAR is entering a bullish season, you can diversify by putting a buy(going long) on EURZAR and USDZAR knowing fully well that the American economy has a different bias than the European monetary authorities, therefore by spreading risk between EURZAR and USDZAR will lower losses if the USD goes in the opposite direction quickly, allowing you to adjust your portfolio. This learned friend of mine went on to explain that for pairs that are negatively correlated, like the EURZAR and the ZARJPY can be used for hedging purposes through the use of the different pip values ( PIP is the smallest move in the price of a currency pair). Hedging is the opening of a position with the purpose of offsetting any gain or loss on the other transaction. Assume the value of the pip move in EURZAR is $10 for a lot of 100,000 and the value of a pip move in ZARJPY is $8 or a lot of 100,000. Knowing this can help us hedge our exposure to EURZAR. (Please be aware that certain countries do not allow hedging) Let say i open a position of 1 short EURZAR lot of 100,000 units and 1 short ZARJPY lot of 100,000 units. When the EURZAR increases by 10 pips, the 1 would in a loss of $100 (number of PIPs X Value per PIP). However, since ZARJPY moves opposite to the EURZAR, the short ZARJPY position would be profitable, nearly up to $80 (this is due to the strong negative correlation). This would turn the net loss of the portfolio into just -$20 instead of the full $100. On the flip side this hedge also means smaller profits in the event of a rally down in EURZAR. However, in the worst-case scenario, losses become relatively lower. CONCLUSION All traders regardless at which stage you are, from novice to grand-master, there is need to have an appreciation of correlations and how they affect your portfolio. work towards: 1.Eliminating contra-trades (Trades that cancel each other out) 2.Diversify Risk. By not putting your eggs in one basket. By taking advantage of the imperfect correlations, one can open two positions in the same direction knowing that you limit your exposure to one pair. 3. Potentially double up on profits. In our example above, the high correlation between EURZAR and USDZAR, would mean that if you open a position one of the pairs you can open a similar position on the other pairs thus potentially doubling profits and vice versa. 4. Hedging. This usually results in lower profits, but it also minimises your losses. 5. Confirm break outs and avoid fake outs. Although I did not discuss this aspect in this article, it is the very topic that will be in my next article that i will be releasing next and will sure be topic that will result in all those finance and economics gurus offering you a 2 minute attentive silence, as they nod their heads to your insightful analysis of the markets. You might even get a "let's chat later privately and explore this in depth, or that's exactly what i was about to say". This will leave you walking a little taller, with a bounce in your step, calling shots. All i am saying is if i can do this, surely you can too. Takunda Mudenge is a market analyst based out of Zimbabwe, Africa. He writes in his personal capacity and the information is purely for educational and entertainment purposes and should not be construed or assumed to be investment advice. The information above was collected from various investment websites and literature and all attempts were made to make it into contemporary English.
by takundamudenge
CADJPY Long Trade SetupHello Traders My forecast can be wrong here if USDJPY makes a strong upward movement as I expect, but what is my forecast here is a pretty big C wave for a complete regular flat. That being said, one more upside seems possible after the 4th wave for a complete regular flat in the B. That's why I want to take a long trade and to do that, I'm waiting for a correction after the reversal impulse. I'll hedge my trade when the previous high is broken. Trade with care. Bulent
Long
by WaveAnalysis
2
Which scenario will come into play?Both scenarios (for now at least are relevant). On one hand, we have a potential double top, with divergence across the two peaks. On the other hand we have a descending channel break with a clean break, hook back and rejection of the channel top.... To sell, i'm looking for a break of the double tops neckline at .912. To buy, i'm looking for the price to impulsively move away from the channel top, at which point i will get into the LTF's and look for longs. Become a student today to get updates on what were seeing. Setups where you can see both sides of the fence are definitely the best type of setups... it allows us to have an unbiased view of the market, this leads to much more effective trading.
by TeePeeFX
USDJPY Long Trade SetupHello Traders Because of the higher degree structure, my forecast is a new low and a strong reversal. It looks like a correction is in the making before the last drop. Now, I'm waiting for a trade setup to buy it. Then I'll hedge my trade before the last drop. If it doesn't give me a trade setup, I'll wait for a new one after the yellow C to sell it. My goal here is to have a trade to hedge it when the price comes into the blue box. Trade with care. Bulent
Long
by WaveAnalysis
Potential short term downside. Personally I plan to hedge out the difference since I had a relatively reasonable entry. Of course I keep a rather wide stop (given the relatively small size of my position) a bit bellow Time Weighted Average Price (TWAP; lowest plain line). That would be the worst case scenario, my entry and long position is based on qualitative (bottom up) analysis. The stop is still, in my opinion, necessary as if the the price breaches far below that my position wouldn't make any sense on any time frame below 3 years. Please note that the arrow is just there to illustrate the potential downside I plan to hedge against. It's not a price prediction, I can't see the future. My short term goal at any given point is always to limit the risk and protect profits. The money will just show up if I'm consistent.
NYSE:KO
by unsignedlemon