Can someone explain to me the benefits of the Ultimate Hedge vs just trading a spread that is near the floor/ceiling?
Let’s say I wanted to buy Eur/Usd and it is trading at 1.5005
The spread is 1.5000 - 2.000 (just for example)
I can buy the spread at 1.5007 and so I have 7 pips of risk.
Why would then I need to then use a hedge when my risk is already so low?
What am I missing here?
On some instruments, the premium can be quite high and there may not be a spread available where price is near the floor/ceiling. So rather than pay a bunch of premium and require a bit of movement just to b/e, the idea is to go with a spread that is more ITM but thus has more risk. Then the hedge is a way to mitigate the extra risk. The ultimate hedge is also a way to a set up a directionally biased straddle depending on how it’s done.
The EUR/USD typically doesn’t have much of a premium compared to others such as GBP/USD , GBP/JPY, or the indices. So even going with a slightly OTM spread is still a lower risk and cost option than other instruments.
When doing a hedge you can often put on a longer expiration contract for the same or less risk which is wider allowing for more profit potential. Also if you exit the directional trade the market can reverse and the hedge can be profitable as well. We cover this and a lot more in detail when we do the ultimate hedge mastery course.