Hedging No-Touch Binary Options with a Spot Forex Position
A decade ago, spot Forex trading was brand new to a lot of retail traders, and provided an exciting opportunity to trade with low entry barriers. These past few years, the focus has shifted from Forex to binary options. Binary options are arguably even easier to start trading than FX, but they do present drawbacks of their own. Both currencies and binary options trading carry an element of risk. But did you know you can open an account with both a Forex broker and a binary options broker and conduct trades in tandem which can help to reduce your risk exposure? In this article, I’ll teach you how you can use a spot FX position to reduce your risk exposure on a no-touch binary option.
What Is No-Touch?
First off, if you are not familiar with a No-Touch option, it is a simple variation on a One Touch option. One Touch options are some of the most common binary options. When you purchase a One Touch contract, it works like this: You look at a given asset, and you wager that the price will touch a certain trigger value before the binary option expires. If you are right, you win a payout. If you are wrong, you lose the trade. A No-Touch trade is the same thing, except you wager price will not reach the trigger value.
No-Touch options are an interesting opportunity, because you are able to profit from the market not moving. You cannot do that in Forex, because in FX, you can only profit off of price rising or falling. Nonetheless, a lot of Forex traders avoid binary options because they are expensive. A winning trade typically pays out 65% to 85%, but a losing trade will usually only carry a 10% refund. There’s a gap there in the broker’s favor, and it can add up to more than your Forex spread. You may feel more comfortable trading a binary option if you can take some of the risk out of the equation, and that is where hedging comes into play.
How to Hedge Your No-Touch Option
Anytime you hedge while trading, you are covering all your bases by setting yourself up to try and profit regardless of what the market actually does. Let’s look at three ways you can approach your no-touch binary options trade:
If you don’t hedge your no-touch trade at all, your risk depends on how much you have staked on the trade. If you win, you will probably get around 75% of your investment as profit. If you lose, you will lose the majority or all of your stake; a 10% refund is typical. Calculating your risk is easy, but you haven’t done anything to reduce it.
Simple Hedging Without a Stop Loss
Let’s say you decide that your risk is too high on your no-touch trade, and you want to do a basic hedge. Open up your Forex account, and navigate to the right currency pair. Take a look at your no-touch option. Are you wagering that price will not go up, or that price will not go down? If you are wagering price will not go up, then in your Forex account you will be placing a buy order. If you are wagering price will not go down, then in your FX account you will be placing a sell order. Set your take-profit to the value of the trigger level in the no-touch trade.
If you set your position size in Forex to the same amount you are risking in your no-touch trade, and the trigger value is hit, you will lose your binary options trade, and win the same amount back in FX. The result is a breakeven, and a profit (and loss) of $0.00.
If the trade doesn’t reach the trigger value but moves in the same direction, you have a shot at winning both your trades. Of course, if the binary option wins, but the currency moves down, you will lose the currency trade. And the danger of not setting a stop is that you could have potentially infinite losses on the FX trade. So if the Forex trade falls far enough, it could eliminate your binary options winnings, and even land you in the red.
Simple Hedging with a Stop Loss
The logical thing to do to prevent infinite losses in your Forex account is naturally to set a stop loss. There are numerous different techniques you can use to set a stop loss; the best ones usually are those that have some basis in what price is doing (support or resistance, a Fibonacci level, etc.). The tighter your stop, the less money you can lose. But don’t forget that a stop which is too tight can stop you out of a trade you might otherwise have won. You’ll need to do some testing to decide on an optimal stop loss strategy.
Setting a smart stop loss and hedging that way typically leads to a more positive outcome. You have several chances to attain profit on one or both trades. There is still the possibility of a breakeven result, but the odds of a loss decrease and your loss will be finite.
Conditional Hedging with a Stop Loss
Does your binary options broker provide you with an early closure feature to get out of a trade early? The conditional hedging scenario is more or less the same setup as above, but you take advantage of the early closure tool if your stop loss is triggered (in your Forex trade). The trade will close “in the money” and pay out a partial profit. While the profit will be small, it may cover some of your Forex losses. When you trade using this method, you still may lose money, but it becomes more likely that you’ll be able to cut your losses—and you still may profit, even in a worst-case scenario.
Use a Hedging Calculator to Choose Your Approach
How do you decide which type of hedging tactic to employ? As you have probably realized, there are a lot of complex calculations you can do for any given trade which will exactly tell you what your risk is given a variety of different scenarios. If you are totally confident in your trade, you may not have a need to hedge. Otherwise, you can save yourself a lot of time (and mathematical errors) by using a hedging calculator for no-touch binary options.
With this calculator, you can input your binary account currency, the option price and payout for a given currency pair, the strike rate, the current bid rate for the currency, the stop-loss price, and the type of hedging method you are interested in (any of the method above). The calculator will generate a set of possible outcomes based on the information you have provided and the method you have selected. The result? An exact calculation of your possible losses or gains. Try running through the information with each hedging approach, compare the results, and see which method is likely to reduce your risk exposure the most and give you the best chance at success. Hedging is a great way to protect your account from losses. With the aid of this calculator, you can save time and money on your journey toward profit.