Community Forex Questions
Benefits of protective puts
1. No stops
You are not required to place a stop loss on your long currency position. How many times have you been heading in the correct way but been interrupted by a whipsaw in the market? I am confident that most forex traders experience this on a regular basis. With a protective put, you have control and may let the exchange rate to fall to zero, if feasible, without exceeding your maximum loss. This benefit, by the way, is also applicable during announcements. You are now in command.
2. Unlimited upside
Unlike many other hedging techniques, this one offers for infinite upside. Gains are offset by the price of the put, but they can still be large.
3. Lower portfolio volatility
Because your loss is limited, the whole portfolio is less volatile. Here's another illustration. I'll suppose that, on average, price and volatility have been fairly consistent over the previous ten years, and that your plan is to acquire a long position in the GBP/USD and an at the money put with a total portfolio leverage of 20:1. During that time, it would have returned 10% every year. When this advantage is combined with smart analysis, it is perfectly conceivable to see substantially higher returns than this.
You are not required to place a stop loss on your long currency position. How many times have you been heading in the correct way but been interrupted by a whipsaw in the market? I am confident that most forex traders experience this on a regular basis. With a protective put, you have control and may let the exchange rate to fall to zero, if feasible, without exceeding your maximum loss. This benefit, by the way, is also applicable during announcements. You are now in command.
2. Unlimited upside
Unlike many other hedging techniques, this one offers for infinite upside. Gains are offset by the price of the put, but they can still be large.
3. Lower portfolio volatility
Because your loss is limited, the whole portfolio is less volatile. Here's another illustration. I'll suppose that, on average, price and volatility have been fairly consistent over the previous ten years, and that your plan is to acquire a long position in the GBP/USD and an at the money put with a total portfolio leverage of 20:1. During that time, it would have returned 10% every year. When this advantage is combined with smart analysis, it is perfectly conceivable to see substantially higher returns than this.
Jun 13, 2022 15:13