The Binary Options Hedging Strategy
You will need to consider two factors when dealing with this type of binary options strategy. One is the idea of hedging, the second is binary markets. You should gain a good understanding of both factors to be able to use the binary options hedging strategy effectively. Trading in binary options involves predicting a movement in the price of an asset. If your prediction is correct you will gain a profit; rates of return average seventy to eighty percent. However, if you are wrong you will lose your investment. This is an either or situation; there is no middle option. It has become a popular way of investing. You may also hear this type of trading referred to as digital options.
There are a variety of ways in which you can trade; these range from short trades lasting just sixty seconds, to simple price direction predictions or even selecting a price that an asset will touch. Binary options traders can trade on stocks, commodities, indexes and even currencies. Whilst most of these trades are considered high risk there is an excellent potential for hedging.
Understanding Binary Options Hedging Strategy
Hedging is a financial term for reducing and controlling your risk and exposure. This is exceptionally important in the stock market as there is an unlimited liability. In binary options your losses are limited to the amount of your investment. A good example of binary options hedging strategy is insurance. This is something everyone has to protect themselves against a disaster of some description.
When applied in a binary context; the principle is to invest in one asset in two different directions. As the asset must move in one of these directions you will gain regardless of what it does. The only question which remains are whether you gain will generate a profit or simply mitigate some of the loss of the other trade. It is a very popular approach when the market is volatile.
Using the Binary Options Hedging Strategy
Possibly the most used version of this strategy is generally referred to as the straddle. To complete this successfully you need to know the high and the low of an asset during a given trading timeframe. You will then be able to place a call option based on the highest price level and a put on the lower level. This is often a good option when the price is moving smoothly up and down. If there appears to be a strong trend in one direction it is even possible to place two trades in the same direction; with different timeframes.
Another option is to trade on currency pairs. This was the original purpose of the binary options hedging strategy! You simply locate a currency pair which usually moves in opposite directions to each other. You can then place two binary options on each currency; a total of four trades; at least two of these trades will be accurate and should generate an overall profit for you.
You can also use this approach when dealing with one touch trading. By placing a touch option and a no touch option you will be guaranteed to generate a successful trade. As the rate of return on these investments can be as high as six hundred percent, only one trade needs to win to ensure you of a profit. Of course, there is a risk that the losing trade will outweigh the profit of the winning trade.
A further consideration is whether to purchase trades which finish at the same time or not. It is sometimes useful to stagger the expiry times of your trades in the hope of generating profits from both options. One thing which is certain is that you should never place a hedging trade without carefully studying the market; this will ensure you are aware of all the risk factors and trade successfully. Hedging is an excellent way to reduce your risk on almost every type of trade.
