Using options, futures, etc. Example......I am long the EUR/USD how can I protect against USD strength or EUR weakness specifically in how they relate to one another? Should it matter, this will be a long term i.e. several months to a year or more position.
You can use options to limit your downside, but if you want to stay long eur/usd you will have to remain exposed to adverse movement -- you cannot hedge away risk completely if you intend to remain long the pair.
Thanks illiquid!! If you would be so kind, please elaborate a bit on what you've said. Correct me if I'm wrong, but I could use options as insurance where perhaps with an outright long position I would receive (or project) a 20% return, but with the options I would guarantee no more than a 5% loss for a net 15% return. With the options I would always "leave a bit on the table." What would be the actual mechanics/tactics of hedging just an outright long position in EUR/USD with options?
That is a good question and I am open to hearing opinions on either. I personally (and I am far from an expert in this realm) think options would accomplish this with a very known fixed "cost." But, perhaps futures would also be great. I am simply looking to hold a long EUR/USD position and give up a % of my projected return in exchange for knowing that position will only go against me so far. I can do it easily enough with stocks,(long 1000 MSFT and selling 10 puts at 30 strike) but I am clueless as to how to go about it with a FOREX position. Then again futures may be a better choice here anyway.......I am just not sure.
The mechanics are exactly the same as your MSFT example (but you would buy 10 puts, not sell), you can also go long eur futures and use futures options (long the put). Or as Oddtrader suggested, just go long the eur call outright, and limit your downside to the premium. I'm no options expert so maybe others can give you more specific, er, options.