Advantages and Disadvantages of Protective Put Strategy
With time, protective put program has acquired a huge popularity among forex traders. Not simply that it reduces the risk, but it helps forex traders to Shield their forex capital as well. In this article, we will try to cover the positive aspects of protective put strategy. Nothing in the world has only confident sides, so as protective put strategy. So, we will discuss the disadvantages of this program as well.

Benefits

Unlimited upside: This is pretty uncommon for most of the hedging strategies, but protective forex put strategy is definitely an exception. The upside is unlimited and though it depends on the strike price, it can still be significant enough.

No stops: you will be not required to put a stop on an open long currency position while trading with protective put strategy. You must have experienced this several times that you are going on the right direction, yet, get stopped because of heavily impacting industry news. This happens to me on a typical basis. But, when you will be utilizing protective put strategy, you are able to let the exchange rate drop to zero with no worrying much. This would ensure that your loss doesn't exceed the maximum you'll be able to afford. In case of several favorable announcement, similarly, you are able to make profit.

Lower portfolio volatility: As the downside is well capped, your portfolio will constantly have lower volatility. For example, you intend to acquire a long GBP/USD position and at the same time the portfolio leverage is 20:1. If the pricing and volatility is assumed to be a lot more or much less constant, you'll be able to actually get 10% return during a year. If a couple of proper research is combined, the returns could be considerably higher.

Disadvantages

Cost of Trading: Forex traders need to pay a commission if they decide to acquire a put. The fees are nominal and constantly get to a lower level due to the competition in the industry. Still, it's like an extra pip that you simply cannot ignore.

Cost of the put: In case you let run a put every month until it expires, that will price you a few great amount of pips, irrespective of the reality that the market goes up or down. Therefore, your upside is eaten up a bit along with a predetermined downside is created.

In case of forex trading, the toughest factor to do is protecting the forex capital. If you are able to Protect your forex capital properly, the profits will automatically follow. Protective put program the reality is helps you with that for a far better trading experience, but has its own downsides as well.