Need advice on using options to hedge USD

A

AirborneTrader

Hey there,

I'm an active but small Canadian stock trader with an account size in the 40K range. I trade US equities and need to hedge my US dollar exposure. With futures and FX options being too leveraged for my account size I figure my best bet is to use options on the Canadian dollar ETF FXC. My knowledge of options is somewhat limited but my strategy right now is to look at deep in the money calls with high deltas that would provide leverage as a hedge. A few questions:

1. Is this a good strategy?
2. I see option volumes and open interest being low for those strikes. Will option pricing still be effective under low volume like that?
3. Looking at 2-6 month expiry
4. If this is a decent strategy when is a good time to roll them over? What to look for?

The idea here is that my trading account is in USD. When I fear a drop in the dollar I want to be able to hedge it. Shorting would require and take out too much capital. Any suggestions would be appreciated. Low volume is a concern right now as to how the options would act. Thank you!!!
 
I appreciate your input. FXC has little liquidity and the options do add a level of complexity which is fine. Your response is spot on OTM, I'm now looking at expanding my IB account to include forex. With 40 to 1 leverage I can buy the needed CAD to hedge. Victor it's a good idea but I don't trade companies around the currencies, also I'm looking at solutions to hedge my entire account exposure, be it cash or investments. My head wants to explode but I think I'm making progress haha thanks for the help!!!
 
Just use spot forex to lock in the USD.CAD rate now. Any money you lose will be made up by money you make on conversion. Any money you make will be offset by the loss on conversion.
 
The issue with spotting forex is when you lose money on forex position. Whilst you make the money back in conversion. Your forex broker is going to ask you liquidate or add more capital.
 
Thanks for all the advice! It took a while to get me head around it but the lightbulb finally lit up. I made it more complicated than it needed to be. Started the day believing I had found the best hedge through options, then considered forex and finally realized the simplest way is to scale in/out of USD/CAD as needed. Been riding the US dollar on the way up and wanted to lock in gains. Instead of maintaining a significant USD balance to trade with it never occurred to me I could go all CAD and use margin for any purchases. If a hedge is needed FXC can come in handy. Been a nosebleed of a day, thanks for the help!!! Great forum!
 
BTW the idea was to hedge short term. USD should keep going up, just taking a breather vs the CAD and will scale back in once it stabilizes. So go dollar!
 
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AirborneTrader said:
BTW the idea was to hedge short term. USD should keep going up, just taking a breather vs the CAD and will scale back in once it stabilizes. So go dollar!
More...

which dollar?
maybe you should be in the singapore dollar etc. etc.?:)
 
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