Hi all, I would like to know if the following strategie can make a profit on the log run: First we take a short binary (Forex) with 50/50 win/loss (like a Nadex weekly binary with asset at the strike) We then take a regular long position to hedge this binary Scenario one: If the asset goes down; we close out everything, close binary at +50 and long at -50 and we break even Scenario two: If the asset goes up; we wait till the binary is at max loss of -50 and we then SELL our long position for +50. We pocket the 50 and wait for the asset to go down. 1. If it does not go down we break even because we lose 50 but won 50. 2. If price goes down and lets say the binary goes to -25, we close the binary at -25 and we have made overall +25 profit. We don't have to close, as long as the price goes down we make profit otherwise we break even. The only downside I see here is the spread. But maybe we just let the long position run a bit further. Do you think this can make a profit on the long run? How can I improve this strategy? I have created a picture to make it more clear
This looks similar to a butterfly. If the underlying does not reach the +50 mark before the binary expires, you'll be at a loss.
Well, you know what they say: if it looks like a butterfly, and flaps like a butterfly ... (it's probably beyond being a caterpillar).
With Nadex binaries you can close out early. So you could take a weekly binary gbp/jpy which has a daily range of 150pip so this way the binary has a big change of maxing out at -50 otherwise you give it a couple days and close out before the premium starts decading.
The option will gain/lose value slower than the underlying. When the underlying is +50, the option might be -35 to -45 based on time left. That's the best case scenario. On the flip side, if the underlying is -50, your option will be +35 to +45. What do you do then? Do you close it all at a loss or you do close the underlying and hope the binary ends up ITM? If market reverts, your binary may end up being worth -50 so you bagged a -100 loss.
Yes I'm am aware of this problem but I noticed that going two contracts at nadex will be equivalent to mini forex at one dollar per pip. I tried this week and the binary was 2 times -50 at 100 pips. So I closed my long position at +100 and know I still waiting what gbp/jpy is going to do. But than again this might not always be the case, I don't know. Are you sure we can not adjust to this (maybe with micro lots)?
A binary option is essentially the delta of a vanilla option at that strike, i.e. if the delta of a call at strike X is .75 then the binary will be priced at .75 reflecting a 75% chance of the binary expiring in the money. Therefore the delta of the binary, which is what you're talking about when you talk about hedging with spot forex, is the gamma of the vanilla option. You're a derivative off in your thinking and once you take that into account what you're proposing doesn't make any sense. I'll warn you again, these facile "strategies" than we all come up with as a newbie are exactly that. The correct way to think about something you see like this isn't "Is this a strategy that only I was brilliant enough to come up with in my first month of trading?" but instead "Is this something that I'd laugh at myself over if I'd taken a finance 101 course so perhaps I should couch it more as a question asking to explain something I don't understand than as some kind of strategy". And maybe take a finance 101 course, there's a bunch of MOOCs taught by the top professors in the world that are free. You'll thank yourself for putting in the effort if you're truly interested in this field.