Hedging Strategy for Binary Options

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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 trades is 75% and that no refund will be given for ones. His 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 . 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.

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Even more importantly, the trader could have minimized his risks as the profit from the winning trade would practically negate the loss of the trade, should price fall outside this window when the expiry time elapses. As such, the reward– 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.

Binary Options Trading Hedging Methods

In this article I am going to discuss and explain you some hedging methods that you can try with Binary Options contracts.First of all, I want to explain what is exactly hedging. Hedging is a way to reduce the risk of your trades. It can give an “insurance” to a trader and protect him from a negative movement of the market against him.Of course, it can’t stop the negative movement but a clever hedging can reduce the impact of the negative movement for the trader or it can even annihilate the impact of the negative movement for the trader.Hedging methods are applied every day to the market by the traders to give a “sure profit”. This profit is usually not very big but it’s steady with low risk.

A very popular hedging method in binary options trading is “the straddle”. This strategy is not easy because it’s difficult to find the righ setups. It’s a strategy about two contracts with different strike price to the same asset. Let’s see a screen shot.

This binary option chart is from GBPUSD currency pair. The general idea of this strategy is to create bounds for the same asset with two contracts. To create an ideal straddle you must find the higher level of a trading period and take a call and the lowest level of a trading period and take a put.That’s why this strategy is not easy, because is a difficult to predict the highest and the lowest level of a trading period. A good trading period for straddle is when the price is moving inside a symmetric channel like this. There is not much volatility to create unpredictable situations. So, look at the chart. We have a previous resistance and a previous support. When the price hit the resistance which the highest level for now we can take a put with 15 minutes expiry for example. After that the price is moving down and hit the previous support which is the lowest level for now. In this level we can take a call with the same expiry, 15 minutes.

Now let’s see the possible scenarios.

1 st scenario: The put contract expires after the reversal in the support and it’s in the money.Five minutes ago we took a put in the support which expires in the money,too. So, in the first scenario we have 2 ITM trades with a high reward.

2 nd scenario: In the second scenario our first put trade will be in the money but let’s assume that the support will not stop the price for our call like the next time that the price test the support in the chart. So, we have an ITM put and an OTM call. This means a very small loss for us.

So, if a trader will create a good straddle the possible scenarios are a high reward or a very small loss.

Some more binary options hedging strategies

These strategies are mainly for binary options trading in an exchange and are about hedging the same or different assets.

GBPUSD and USDCHF are two currency pairs which usually moving opposite to one another. Let’s see two screen shots.

This is from GBPUSD currency pair. You can see that at 12:25 the GBPUSD is moving up and about 50 minutes is still moving up.

Now, this USDCHF currency pair chart and you can see that the same time(12:25) the price is moving down and about 50 minutes is still moving down.

So, there are opportunities to trade this. I usually open 2 trades (one in GBPUSD and another one in USDCHF) in Spread Betting or Spot Forex with the same direction. You will win one of them for sure.For being profitable with this you should find the right time in which these two currency pairs give you a profit.For example in this chart we can open two sell orders.Even in first 10 minutes we will have profit because the downtrend in USDCHF is stronger than the uptrend in the beginning.

This is a trade I took which gave a 36$ sure profit. For doing this in Spot or in Spread Bets you must have a good margin in your account.

These two pairs EURUSD and GBPUSD are moving in the same direction. You can hedge them in a binary options exchange.Let’s see an example.For the example we will use 2 five minutes contacts in these 2 currency pairs.The contracts are opening for example at 10:00 and the expiry is at 10:05.We are buiyng a call contract for the one of them and a put contract for the other.The premioum for the both of them are 100$ because we are buying at the beginning before the price move.(50$ for EURUSD and 50$ for GBPUSD).After some minutes the market has moved to one direction up or down. One of our contracts will ITM and the other OTM. Now, for example at 10:03 we are closing the OTM contract with a small loss like 20$ the most of the time and there are 2 minutes left for the winning contact to expire. The contract will expire and we will earn 100-50=50$

50-20(our loss)=30$ sure profit if will not happen an unpredictable movement in the market like a big candle of 3 or 4 pips.

Binary Options Hedging Strategy

Using strategies in the dynamic world of Binary Options is a must. With so many different kinds of strategies out there, it becomes only a matter of personal choice when it comes to choosing the one to use in order to ensure great profits or limit fatal losses.

Some of the strategies are directed more towards the professional, experienced traders while others target the newbies, giving them a chance to put a simple method to a great use.

A good example of these newbie-oriented strategies is the Binary Options Hedging Strategy. It is one of the most popular ones in the binary options community; one with a range of everyday users relying on it; users who vary from inexperienced to advanced traders.

That leads us to the most important question to answer:

What exactly is the Binary Options Hedging Strategy?

Before putting it in a binary options-context, we must first look into the meaning of the hedging itself. In simple words, hedging means mitigating, controlling or limiting risks. A real-life hedging is, for instance, buying insurance for your house that will act as a hedge against weather disasters or thieves.

The similar concept applies in the options trading market, too. With the Binary Options Hedging Strategy, you are to execute both put and call options on the same asset, at the same time. This is mostly used in volatile markets, sensitive to the surrounding and easily affected by the accompanying events.

The idea is to cover both possible outcomes simultaneously in order to prevent losing all of the funds invested. This way or the other, upon expiring, there would be profit from one of the trades and you are guaranteed a moderate gain or, in the worst case scenario, as less a loss as possible. So, basically, in the binary world, the Binary Options Hedging Strategy is your insurance against bankruptcy.

So, where can this strategy be applied?

The number of ways in which this particular strategy can be used is almost unlimited: from commodities to currency; pretty much everything on the market can be hedged. In fact, currency as one of the most heavily traded assets, subjects to hedging on a day-to-day basis. Currency pairs such as EUR/USD fluctuate a lot which lays the ground for the perfect hedging scenario.

Whichever you choose to focus the Binary Options Hedging Strategy at, one thing remains crucial: market observation is a thing you cannot proceed without. Follow the news, keep in mind all the things that can affect the price of the asset you are trading, read the charts carefully, analyze the statistics and always, always make informed decisions only!

Ensuring profit with as little risk as possible is the ultimate goal for each trader and as we mentioned above, there are different methods and techniques in order to achieve that. Ranging from ones that are simple and easy to use to the more complex and difficult to comprehend, these techniques, combined with a thorough market analysis, can be a life-saver when it comes to trading binary options.

Still, not everything is rainbows and butterflies. That is why the most important piece of advice regarding these strategies is to approach them and use them with caution, using only the ones you are confident in! Remember, the best strategy is always the one you excel at!

DISCLAIMER: Futures, stocks and options trading involves substantial risk of loss and is not suitable for every investor. The valuation of futures, stocks and options may fluctuate, and, as a result, clients may lose more than their original investment. The impact of seasonal and geopolitical events is already factored into market prices. The highly leveraged nature of futures trading means that small market movements will have a great impact on your trading account and this can work against you, leading to large losses or can work for you, leading to large gains.

If the market moves against you, you may sustain a total loss greater than the amount you deposited into your account. You are responsible for all the risks and financial resources you use and for the chosen trading system. You should not engage in trading unless you fully understand the nature of the transactions you are entering into and the extent of your exposure to loss. If you do not fully understand these risks you must seek independent advice from your financial advisor.

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  • Binarium
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    Best Choice For Beginners!
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    Free Trading Education!
    Free Demo Account!

  • Binomo
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    Only For Experienced Traders!

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