Darrell has some great posts and videos on directional premium collection trades using spreads, if you aren’t familiar with how to do them, do a search on premium collection using nadex spreads here in the forum and you will find a wealth of information.
Today in the Nadex Pit, somebody asked about hedging a directional premium collection spread with a binary, I have had some success with doing this and I responded to the question. I was also asked if I could put it in the forum so that anyone who might be interested can have a step by step how to. If this is in the wrong section, I apologize.
I would like to start by stating that there is no such thing as a trade that can’t lose, risk is a part of everything we do in life (especially trading) and the best we can do is minimize the sting. That being said, here it goes:
- Does the binary hedge offer value (1 spread - for me hedge offers no value / Multiple spreads - hedge offers value)
- I place my hedge where it is going to provide maximum value (if I am short I will look to buy a cheap binary with a strike price at or just below the entry price of my spread / if I am long I will look to sell a cheap binary with a strike price at or above the entry price of my spread) Example A below
- Using the stop trigger plugin, I set a stop loss on my spreads for X ticks above my entry price on a short trade / X ticks below my entry price on a long trade and set a TP order on the binary for $75/$25 (This is more for cases where I can’t manage the trade personally and I need more of a set it and forget it type of situation due to being otherwise preoccupied with something else yet giving the trade room to breathe) (X = the number of ticks I am willing to let the spread go out of the money depending on the number of spreads/binary hedges I am using…if you hate math, this isn’t the trade for you).
Below is a visual example of how a trade could potentially work out (no guarantees). This isn’t the best example because I would not have used a hedge in this situation (decent trend down, trend catcher lined up with chop filter and MVP all lining up and then red APEX patter forms), but let’s just say I did hedge it this is how it would have played out:
Example A
There is a lot going on in this trade in a very short amount of time, and there is no guarantee that the price will not take out your stop loss on the spreads only to come back below the floor without ever hitting the TP on the binary, so that being said this isn’t a “holy grail” I can’t lose trade, there is still risk. This however does give your trade the opportunity and the space to finish in your favor. Another option is to set the stop trigger to get you out of the binary at the same price it gets you out of the spread and not set a take profit.
So to wrap this up before I become famous for long winded posts, hedging is not the answer to the can’t lose trade, but with proper use it can give you better risk management and also give your spreads a little extra breathing room to work in your favor.
I hope you found this helpful, please let me know if you have any questions.
Peter
