If you’d like to expand on the idea of using currency options instead of a stop loss, you can play a mixture of option types and strike prices.
You may want to read the intro article “Trading Forex without a Stop Loss: Currency Options” if you haven’t already.
By combining multiple strike prices and both vanilla and binary options, you can manage your risk at a cheap cost, while maximizing profits.
My favorite mix is the 5/10/4 strategy.
Buy 5 listed options at-the-money, plus 10 at a higher strike price, and 4 binaries.
One example: EUR/USD is at 1.3015 and we plan to go short with 10 positions. To protect those 10 shorts, go long 5 of the 1.3000 strike price weekly call options at .60, and 10 of the 1.3100 calls at .08, for a total cost of $380. Additionally we buy 2 daily binary call options at a 1.3040 strike price for $20 each, and 2 more at 1.3080 for $5 each. If you’re not familiar with Nadex binaries, read “The Pros and Cons of Forex Binary Options.” Now we’ve spent a total of $430 to protect our short positions. If the Euro rockets to 1.3150, our loss will be $380 ($1500 spot loss + $380 options cost, then ); however, we gain $400 on the 4 binary calls. Our total loss is reduced to just … nothing. It’s a $20 gain.
On a nice collapse in the Euro to 1.2865, our profit would have been $1,070 ($1500 spot minus $430 cost of options). An excellent risk/reward ratio.
The break-even point on that trade is just 43 pips lower than spot entry. We make profit from 1.2971 and downward. For more risk management, we could have take half our positions off the table at 1.2950 and let the remainder sail down to 1.2865 and beyond. The profit is still palatable.
There will be times when the currency pair doesn’t move much. It lingers, winds, and range trades for far too long. In that scenario you will probably see a small loss or a small profit. They key is that the loss will be quite small, regardless of the currency direction.
Try various combinations, using both vanilla (listed options, such as EUU and YUK) and binary options (such as the NADEX options). Use stair stepping on your strike prices, and find the right comfort zone for you and your wallet. Everyone has his own risk level, and some of us want to minimize risk for smaller profits, while others want to accept a larger risk for maximum profits. Find the combo that works for you.
Note: This article is Part 2 to Trading Forex without a Stop Loss: Currency Options
Top 2 Binary Options Strategies
The Pros and Cons of Trading Binary Options
Forex 5-Minute Scalping Strategy