Binary Options Hedging Strategy
When you are trading in financial market, there are bound to be risks, this risk can never be completely eliminated owning to the fact that the activities of the market are controlled by the actions and inactions of actual humans, hence we can only find a way to minimize these risks. And thats where Hedging comes in. Hedging is a strategy employed in binary trading to reduce the risk the trader assumes in his investment by making use of put options, Call options, Short selling methods or future contracts.
Hedging was originally developed as a trading tool for the Forex Market; which itself carries a lot of risks. Managing these risks that comes with the market is what makes the difference between a good trader and an average one. Every good trader likes to give some sort of insurance to protect him from negative movement of the market. Hedging cannot stop the negative movement in the market but it allows clever traders to minimize the effect of negative movement on their traders. Traders applied hedging strategy everyday to give sure profit though the profits usually aren’t that big but its steady with low risk. Whether your intention is to finish in-the-money or out-of-the-money, hedging can work for you.
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Call And Put
If you are conversant with binary trading, then you will know that a Put in binary means that you are predicting that the asset will have a fall in value while Call means you are predicting that the asset will increase in value.
An Example of Hedging Strategy On Binary Options Trading
Lets show an example of how hedging strategy actually works when you employed it in your trade of binary options.
Lets use Facebook.com shares as our case study investment
Assuming that in our example, Facebook shares is traded at $51 and the market is bullish, we analysed the market and the shares charts and decided that the price will keep on rising for the next thirty minutes or more, hence we call a trade with an expiry time of 30 minutes. We keep on watching the actions of the market which seems to be very volatile and the trade is still in our favor but the market is showing signs of reversing the trends and we dont want to end the trade out-of-the-money. This is when hedging strategy comes into play. Since we dont want to end the trade out-of-money, we will now decide to buy a Put option in order to protect our loss.
By triggering another trade in opposite option but with same parameters we cancelled the risk from our previous option, i.e. we put in a trade that has same expiry time and potential profit. One of the amazing benefits of hedging strategy is that it can lead to double profit. Are you wondering how this is possible? Remember that we bought a call option on Facebook when their shares was traded at $51 and the price keeps on increasing until it reached lets say $56 and reversed. We then use hedging strategy to bought a put option at lets say $54.7, if the 30 minutes elapses and both traded ended within the range of $52 -$54.6 we will take home double profit as both binary options ended in-the-money. Had the result been any other one apart from within the range, the trade would have ended at-the-money with no lose.
The beauty of binary options hedging is that it can be used both by a beginner and experienced traders. Beginners into binary option trading can easily understand how using hedging strategy can help them to minimize their loss and take home more profit.