Binary Options Hedging Strategy
Understanding binary options hedging strategy will involve understanding two basic components- the binary option itself, and the hedging process. Binary options are popular variety options, a financial instrument, which have two possible payoff modes. Like a binary system which is based on 1’s and 0’s, a trader of binary options either gains a profit on the invested money or does not gain anything at all, in fact loses the investment.
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For this, binary options are also known as digital options. Binary options could come in many different forms: like high/low, rise/fall, 60 seconds, one touch etc. In all these varieties, a trader basically puts wagers on the price movement of an underlying asset. Underlying assets could stocks, commodities, forex, and indexes. These types of options are of high risk-high gain variety. It is popular for hedging purposes as well. In fact what many traders do not realise is that they are probably using binary options for hedging.
What is Hedging Strategy?
The next important step in understanding binary options hedging strategy is to understand hedging. Hedging basically means controlling or mitigating risks. For example, insurance is a hedge against unforeseen calamities or disaster. In case of trading, a typical example of hedging would be going long on a financial asset and going short on an opposite or competing asset. The idea is that both these assets cannot move in the same direction, upward or downward, at a given period of time.
Therefore, there would be profit from one and loss from other, resulting in a moderate gain or as less a loss as possible. Hedging is popularly used in volatile market conditions to maximize gains and minimise loss.
How Does Binary Options Hedging Strategy Work?
One of the popular binary options hedging strategy is known as the straddle. A straddle is difficult to execute because it requires identifying the highest and the lowest levels of an asset price during a trading period. There would be two binary options involved in this case- a call option on the highest level and a put option on the lowest level. An ideal period for this kind of binary options hedging strategy is when the price is moving symmetrically. A trader, might also want to bet on two positions in the same direction, instead of opposing directions, in case the there is strong trending price movement.
Binary options hedging strategy may also involve currency pairs. In fact, hedging as an advanced risk mitigation financial strategy initially was developed for trading in foreign currencies. For this kind of hedging strategy, a trader needs to find out a pair of currencies that usually move in opposite directions. Two binary options, each on each of the currencies will mean profit from either of the two in a given period, as price of one will go up while the other goes down.
Binary options hedging strategy might also involve one touch binary options. The inherent risks of a one touch or touch/no touch binary options are very high. But, at the same time one can gain even up to a 600% profit. This kind of strategy can be used when the market is strongly trending. Buying two binary options in this case will involve two trigger values of the same financial asset’s price. In the best case scenario, there could be profit from both positions. But in the worst case there would be bigger loss. The third, moderate possibility is one loss and one win.
While formulating a binary options hedging strategy, a trader may want to buy both binary options to be expired in the same period or different periods. For example one may predict, based on the market dynamics and indicators that the market might go up in the next few days or week, but come down after, say, a month. So, the two binary options, the trader buys may expire in two different periods.
Whatever type of binary options hedging strategy one chooses to adapt, it is crucial to observe the market movement closely before betting. Although trading or hedging in binary options is more like betting, it should not be based on pure gut feeling. The decision should have some sound reason behind it. And, no matter what, one should always look for opportunities to hedge the risk.
How to Choose Binary Broker?
In order to start trading online you need to open an account with legit and trusted broker. In this field there are numerous non-regulated brokers, most of them with shady reputation.
Still, we are struggling to find the good ones and provide you with their unbiased reviews and customer feedbacks. Trading binary options is not absolutely free of risk but we can help you minimize it.
By researching the market daily and following the financial news, the team at Top10BinaryStrategy is always up to date with the latest alerts, and upcoming launches of trading systems, and brokers.