Binary Options Hedging Strategy

Binary options traders use hedging to ensure profits and reduce risks especially when volatility is high or market conditions become more unpredictable. Fluctuations in the market can cause trades that are seemingly successful to turn around unexpectedly. Hedging is used to figuratively trim off the price that will allow traders to trade in boundaries, making the cash flow more manageable.

Hedging has been used as a general trading strategy but is relatively new to binary options trading which introduced to the markets a few years ago. Hedging strategies quickly gained momentum for the reason that it is easy to understand and implement. One of the major features of hedging is their ability to extract the maximum benefits from the fundamental structure of binary options while minimizing loss.

Particularly, hedging allows binary options traders to take advantage of the fact that binary options only result to two possible outcomes when a trade expires. The success of hedging strategies for binary options depends on knowing the right time to execute the trades. Learning the precise moment to execute the strategy will minimize the uncertainties that can come up during the period of the trade.

Binary options trading was developed with simplicity in mind. However, trades still harbor an innate degree of risk. This is the reason why experienced traders recommend that new ones should only trade this new investment vehicle by using a sound and trusted strategy. This is also where hedging becomes an advantage because it is ideal for all traders, especially novices. Traders will be able to substantially increase their profits while minimize their risk in doing so.

Someone who is new to binary options would find that one of the best courses of action you he take is to learn how to use hedging strategies effectively. A new trader can quickly make up for his lack of skills and knowledge by implementing the strategy correctly. When a novice trader takes up strategies that involve hedging, he is able to learn more strategies that involve multiple trades and risk reduction.

Basically, there are only two possible outcomes that can result whenever a binary options trade has been made. A trader can either suffer a predetermined loss or succeed a predefined gain. Because of this, the risks involved are great especially that financial markets can experience high levels of volatility that can generate sudden price surges with practically no warning whatsoever. Such events can cause profits to turn into losses in the blink of an eye.

We have discussed many strategies to minimize these risks. In addition to those strategies, experienced traders recommend using hedging strategies. This effectively minimizes risk exposure while securing profits. Below is an example provided, so that new binary options traders may use it as a blueprint in coming up with their own strategies. Bear in mind that new traders need to perform this in a demo account first, before going live.

Example

Hedging in binary options is one of the easiest strategies to implement. Expert traders may have derivatives of this strategy, but the basics still stand. Furthermore, learning the foundations of hedging can branch out to other strategies that the new binary options trader can use. Because there are many ways in which hedging can be implemented, let us consider a popular method that entails combining both Call and Put binary options.

Let us use a hypothetical trader who chooses to trade FOREX particularly the Euro USD pair. Imagine that the binary options trader just received the following tip from his binary options broker. EUR/USD currently has a bearish bias with a put option price beneath 1.3650 and a call option price of 1.3350. Imaging the trade to expire in one hour and the price slipped under the 1.3650 level at 10:30 am EST.

The trader now decides to purchase a Put option based on EUR/USD. He first selects an expiry time at 11:15 am EST then deposits a wager of $100. This sum is 2% of his entire account balance and is in accordance with his money management strategy. The trader sees that the payout for in-the-money trades is 75% and that no refund will be given for out-of-the-money ones. His reward-to-risk ratio at execution is therefore 80%:100%.

With about 15 minutes before expiration, the trader sees that the currency price has declined and that his trade is presently in-the-money. However, volatility is high and the price is presently registering an oversold condition. In addition, the trader notices that price is beginning to rally so that it could possibly threaten his position by expiration. What can be done to protect his gains? The answer would be hedging.

By purchasing a CALL binary option with the same parameters as those of the original Put option, that is, same asset, expiry time and wagered amount, hedging can be performed. The trader now creates a new window of opportunity bounded by the opening prices of his Put and Call binary options. Consequently, the trader could possibly collect a double return if the price finishes within this range at expiration.

Even more importantly, the trader could have minimized his risks as the profit from the winning trade would practically negate the loss of the out-of-the-money trade, should price fall outside this window when the expiry time elapses. As such, the reward–to-risk ratio now becomes $150:$20, which is an obvious improvement compared to when hedging is not performed. Instead of losing $100, winning $80 would mean that he would only lose $20.

As you can see from this example, using a hedging strategy is a simple yet very effective tool which can both secure your profits and reduce your risk exposure at the same time. As the financial markets can change drastically in volatile environments, you will find that mastering how to execute such a strategy proficiently is an excellent method to counter such unpredictability.

We will continue to provide you with more strategies that will help you improve your chances of success with binary options. In the meantime, you could check out our list of top brokers who can give you demo accounts so that you can practice hedging and use it efficiently.