Many times I am asked, ” Is there a way I can enter trades with zero risk?” The short answer is NO unless you use some type of arbitrage method. The spreads on nadex are still too wide for arb, in my opinion.
There is a way to buy insurance for your trades though. Let us take a look at insurance companies and what they do.
My auto insurance is through State Farm. I pay my premium every month and don’t think a thing about it because it is just something I have to do. I know that in the event of a catastrophic accident, I am covered from most of my losses. I am never covered 100% like they want you to believe but sometimes it can be close.
Why am I never covered 100% in my losses if something goes wrong? Deductibles, pain and worry, etc…
Do traders buy insurance on their trading activities? Sometimes they should and you can. In traditional markets, you can do it with options. In nadex, we can do it with weekly binaries. Here is how.
Pretend the Wall Street 30 price is currently at 16947 (which is where it is right now)
On Monday, lets say I want to go long (or buy) the wall st 30. I want to buy the 4:15pm contract at 16940 for $50. Let us pretend price dropped to that level and my trade got filled. Let us also pretend that price began to fall and fall and fall.
My day is ruined if it closes at 4:15pm at 16939 or lower. How can I potentially protect against losses using weeklies?
Well you can never protect against everything but if you are in a week where the market just tubles out of control, you can recoup some or all of your losses implementing the strategy I will lay out below.
I have bought the wall st 30 4:15pm at 16940 for $50.
I have also sold the wall st 30 WEEKLY binary of 16725 for $12. I sold 4 of them. The total cost of insurance for the week is $48.
All week, I am only long. In other words, all week, i will only buy on dips.
Now how does this play out?
The price difference between where price is now (16940) and where the weekly binary is sold (16725) is a total of 215 points.
As price continues to fall, my weekly binary begins to slowly gain in value at 4 times the rate of my 1 contract that I am buying on the daily.
If price were to be a crazy day like last week and the overnight markets fell 200 points, my weekly would be worth $152 and my daily trade that i lost would be worth -$50 which is a net profit of $102.
If price just skyrockets and you win all 5 trades that week, you lose your ‘insurance’ of $48 and gain $250 from your 5 long trades (one per day).
NOTE: This is an example. Price could do all kinds of crazy things but there are ways to hedge your risk. This was just an attempt to get you thinking.
What if you placed 1 weekly short ATM and 1 daily long atm at the same time? How would this play out?
What if you bought an atm daily and sold a deep itm weekly?
Just try for a few minutes to think a different way. Whats possible?