One of the more interesting recent innovations we’ve seen in the Retail FX and CFD space has been trading insurance. For a certain premium, traders can limit their downside risk on any specific trade.
Hedging trades and overall trading books is a common technique used by institutional traders, but now with trading insurance it is also accessible to retail traders. And one of the first brokers to launch trading insurance is Ireland based and regulated AvaTrade, with a product called AvaProtect.
We caught up recently with AvaTrade CEO Dáire Ferguson, here is what he had to say:
FNG: Hi Dáire, and thanks for joining us today. How does AvaProtect work? It seems a bit pie-in-the-sky to offer leveraged FX and CFD trading with little to no risk.
Dáire: AvaProtect is a risk management tool that gives our clients a simple way to protect their investments. Strictly speaking, what it offers is a way to limit the downside risk of any investment to just a small fraction of the margin, which is the cost for taking out the protection – similar to the premium on an insurance policy. We know that volatility makes price movements larger and less predictable. AvaProtect swings the odds in favour of our trading clients, making it an invaluable tool and ensuring traders can tolerate losses on a higher proportion of trades and still come out in profit overall.
It works because, in the background, we execute matching options trades to hedge the exposure. In effect, what we are doing is adding a layer of sophistication to our clients’ trades through these options positions, but without requiring the customers to work out the math, execute the additional trades and take on any additional exposure (we manage this ourselves). This means we can offer protection based on the options market, which prices risk as a function of market volatility and the duration of the protection.
More seasoned users could create a similar set-up for themselves using our options trading platform, AvaOptions, which enables clients to configure and execute a wide range of strategies, but the beauty of AvaProtect is that it offers the same level of protection in the shortest term with unparalleled simplicity.
It’s not magic – it is sophisticated hedging made simple and accessible.
FNG: What are the “premiums” like on a typical trade? Say I wanted to protect against loss on a €1,000 open position in EURUSD. How much would that cost (roughly) on a daily or weekly basis?
Dáire: AvaProtect offers protection for one, three, six, or twelve hours, or for one or two days. The longer the protection, the higher the cost. As of mid-August, protecting a €1,000 open position in EURUSD for an hour on the AvaTradeGO or Ava Webtrader platforms would cost around 80 cents. For three hours, this would cost $1.35 and for a day, $2.50.
This is particularly low-cost because EURUSD is not a very volatile currency pair. If we look at the gold market, which is much more volatile, protection is more expensive – but appropriately due to the increased risk. Based on pricing as of mid-August, protecting an ounce of gold for an hour would cost $4.50 and a day would come to $10.80.
This is still very small compared to the asset price – and that’s the beauty of AvaProtect: it limits the downside without limiting the upside. This means they can stick with their trades even if the market starts to move in the wrong direction. Gold, for instance, has recently seen peaks and troughs in its price more than $100 apart (around 5%), while continuing an otherwise solid upward trend.
These kinds of movements could well see traditional risk management tools, such as stop loss orders, trigger a quick exit of the trade once the price starts dropping, netting a loss, even if the asset returns to its upwards trend. Using AvaProtect, on the other hand, traders are reimbursed for any loss when the protection expires, meaning they can protect against the risk and stay in the trade, benefiting from the positive overall momentum. This is the kind of situation where AvaProtect offers a huge edge.
FNG: How has the client uptake of AvaProtect been since you launched it? How have clients responded, and how many are actively using it?
Dáire: It’s still early days, but, so far, the feedback has been very positive. We see many new customers using AvaProtect as a secure safety tool as they start trading, but equally, more experienced traders are using it to protect positions where they see short term risk but long term potential. We are optimistic that the product will continue to increase in popularity as it reaches new audiences and they understand the power of this tool.
FNG: Was there any clearance from regulators you needed before launching AvaProtect?
Dáire: We are always looking to be regulated in new areas because it helps demonstrate our trustworthiness as a broker and our commitment to creating a safe environment for trading. We can see the true benefit of AvaProtect as a unique and bespoke offering, and clients will feel the benefit of this with the added protection it provides. Regulators can equally see the benefit of this kind of product because it limits the risks for customers. As we are already licensed for options trading via our AvaOptions platform, we are also licensed to provide AvaProtect in every jurisdiction in which we offer the product.
FNG: The past few months have been somewhat challenging for businesses around the globe, but the CFD sector seems to be doing OK overall thanks to heightened volatility. How has AvaTrade been doing through the Covid crisis? What have been your main challenges as you manage your business globally?
Dáire: Similar to many online companies, the pandemic has given our business a significant boost. In particular, the increased volatility has prompted many new traders to sign up to our platform, looking to profit from more and more significant price movements. This has placed our business performance metrics on an upward trend throughout the pandemic, though I would also stress we were already forecasting another year of the strong growth we have seen in recent years.
In terms of challenges throughout this period, one major goal is ensuring we keep the new customers who are joining us, and that means making sure they are able to make informed decisions and hedge the risks they take. Volatility means scope for big losses as well as big profits and tipping the balance in favour of profits is exactly where AvaProtect comes in – giving both AvaTrade and its clients a competitive edge in their respective markets. This is a game changer for the industry.
FNG: What else can we expect to see from AvaTrade in the coming months?
Dáire: Given its unique positioning in the market, we expect to see significant growth in AvaProtect in the very near future. There is nothing like it available at the current time and we believe it marks a big step forward in opening up the industry to a wider audience.
As a brand that prides itself on safety and regulation we’re always looking to capitalise on new opportunities in this space. We’re constantly watching the market and are interested in expanding – be that through acquisition or opening offices in new jurisdictions. With regard to product coverage, meanwhile, we will be introducing AvaProtect for equity indices before the end of the year. Our goal remains to allow our clients to ‘trade with confidence’ and AvaProtect is yet another component to deliver this objective.