Forex Digest

State the ways to hedge the futures contract and how to use the options contract effectively . The strategy of combining both futures and options contract.

It is not totally clear to me what you are asking. You started by asking about hedging in the stock market, then went to hedging futures contracts. Futures contracts do not trade on the stock market.

I will interpret the question as "How do you use options to hedge stock or futures positions?"

The primary risk in both stock and futures positions is what is option traders call "delta" risk, the loss when the price of the stock or future moves in the wrong direction. Long positions have a positive delta, while short positions have a negative delta.

That risk can be hedged by taking an options position with the opposite delta. Deltas for options are

positive for long calls
negative for long puts
negative for short calls
positive for short puts

So, if you have a long stock (or futures) position you have a positive delta. To hedge that risk you can take an options position with a negative delta by buying puts and/or writing (shorting) calls.

Similarly, if you have a short stock (or futures) position you have a negative delta. To hedge that risk you can take an options position with a positive delta by buying calls and/or writing (shorting) puts.

2008-01-27 03:55:56 by Nandin

Hedge Strategies is a report generating newsletter that defines the benefits derivative strategies provide for protecting investment accounts ...

There are Forex options, but you are delving into a complex and dangerous world of unknowns too difficult to explain here.

A hedging strategy is essentially a method to reduce risk. Have you considered other strategies to reduce risk, that don't cost you anything or open new positions or cause greater overhead and more maintenance?

One such strategy involves not leveraging a futures position to begin with. I trade Forex and other futures for living, and rarely do I see people that understand fully the significance of leverage.

You can buy $100,000 worth of currency with $1,000 margin in a standard account. This would be the purchase of one standard lot, at 100:1 leverage. Or you can get 200:1 leverage in a mini account. Wo, how much trouble can we get into now?

Just because you "can" doesn't mean you "should" trade with this kind of leverage. Trading stocks with 2:1 leverage is considered risky.

What most people don't seem to realize, is that you don't have to trade with leverage at all. Just put $100,00 in your account, buy one lot, and you have zero leverage. Or put $10,000 into a mini account and buy one mini-lot, or $1000 and buy one micro-lot.

You can see that by controlling leverage, trading the Forex doesn't have to be any more risky than trading stocks or any other investment.

The same holds true with all or any futures contract. You decide how much leverage to use, and how much risk to accept.

You can accept the maximum leverage like most people looking to "get rich quick," and blow out like 80%-90% of all traders, or you can play it smart and ease into it slowly, starting with a simulator while you're learning, probably for at least six months.

There is no need to hedge a currency position any more than there is any need to hedge a stock position, if you control the leverage.

2006-09-20 05:07:46 by Inquisitive

I would like to know a simple hedging strategy for forex.

I'm new to forex, I got a demo account right now, but I'm losing money. What's a good stategy, and what's a simple way to know which direction a currency is headed.

I know it's hard but what are some of the obvious indicators. In stocks when there is some scandal or a defective product it's guaranteed that the price will go down, is there obvious indicators for forex?

There are many indicators that can give you some idea in which direction the currency price will move, but there is absolutely no way to guarantee that the price will move in expected direction.

Some of the obvious indicators in forex would be for example some political and economic situation on a larger scale that could lead to the change of currency price. This is known in forex as fundamental analysis.

There is a free e-book you can download that can explain you more about how this works. You can find e-book on this website:

http://www.forex-trading-secrets.net/

Hope this helps!

Best regards,

2008-03-13 17:28:28 by kerr to u

what are some strategies that u could share with me. I'm relatively experienced with stocks. I generally buy stocks when there is a bad day at the market, and sell them when the market recovers. What's a good strategy, and I would like a hedging strategy if there is one or u guys know one.

<<< I generally buy stocks when there is a bad day at the market, and sell them when the market recovers.>>>

Buying stocks that are having a bad day is frequently called "trying to catch a falling knife" because it is considered a high-risk technique.

<<<What's a good strategy ...>>>

Historically, the best strategy has been to be a long-term buy-and-hold type investor of quality companies.

<<<I would like a hedging strategy if there is one or u guys know one.>>>

A hedging strategy is only good if you understand the factors involved. For example, the first answer suggested you use options to hedge, by either buying puts or selling calls. I agree those are probably the most common ways of hedging a stock position, but they are used far too often by people who do not understand all the implications. They are very different strategies.

You would sell covered calls when you expect the stock to trade in a narrower range than the range predicted by the rest of the market. but you would buy protective puts when you expect the stock to trade in a wider range than the range predicted by the rest of the market.

Unless you know how to make that decision, using options to hedge is probably not a good choice.

My recommendation is to learn about option trading before trying to use options to hedge. You can start your education with the free tutorials at the CBOE Learning Center

http://www.cboe.com/LearnCenter/default. aspx

but I would recommend reading at least one good book on options before trading them.

You can also hedge with futures, short stock positions and bearish ETFs. I believe if you know what you are doing options are a better tool for hedging than the others, but that may be because I have spent more time learning about options.

2008-03-13 17:30:10 by kerr to u

there are many, it all depends how active a trader u want to be ... most ppl just want to sit on their ass and make the most money, but this is not really realistic, your return will increase relative to how much time and effort you want to put into developing and implementing your risk/reward strategies.....

2007-01-10 04:38:12 by MICKEY M