Hedging with Binary Options

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Advanced Hedging Strategy

Money management is one of the crucial things that you need to apply while trading options. During your binary options education as well as trading you can come across many different strategies that will confuse you.

Talking about hedging strategy in particular, it can turn out to be very useful if in the right hands. In fact, it enables traders to mitigate the further risks of loss due to traders’ own mistakes caused by bad decisions in the past. Indeed, potential profits are cut as well.

How Hedging Strategy works?

In order to explain the mechanism of hedging, we suggest referring to the practical example.

Say that at 8:00 GMT you are going to buy Call option on the USD/JPY currency pair at 120.25 strike with a respective price of $86 and an expiration at 9.00 GMT the same day. So, in case of successful outcome the payment (considering the fact that at midnight the price will be higher than 120.25 for any value) will be 75% or $64.5. In case of fail, you will get from the best broker a refund of 10% or $8.6. After a while, you observe that at 8:30 GMT the price of USD/JPY is 120.35.

Now you will see how one currency pair hedging comes handy. Based on the example above, if you presume that it is possible for the further progress to be changed in the completely opposite direction, then you will have to buy a Put option of the equivalent amount and with the same expiry period at the new strike price.

Therefore, you are creating a sort of corridor in which the price is expected to move.

Hedging Strategy – possible outcomes

Our situation has three potential consequences at 9:00 GMT:

The price of USD/JPY is lower than 120.25. Thus, first Call option is lost and the Put option wins. So, the net profit will be $74.5 (meaning $64.5 for profit trade + $8.6 refund of loss). Your overall investment here is $172 and you have $11.5 of net loss from the two deals.

Second outcome is that the price of USD/JPY continues to grow. Then, by the 9:00 GMT the price is above 120.35. We have the following results: the first Call option wins and the Put Option is out. The payment is $159.1 in total ($150.5 + 8.6 refund of loss). Hence, you have invested $172 and the result is $11.5 of the net loss from two deals.

The last consequence is that the price of USD/JPY is between 120.25 and 120.35, which means that both deals are successful for you. So, the total payment will be $301, as you receive $150.5 for each of the two trades. Considering the investment of $172, the net payout in this case is $129.

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How can we actually hedge with lower risk?

We can definitely say that before any deal it is advisable to look at the market behaviour and choose the most proper time to trade. Hedging can still bring some loss as we can observe in the first two outcomes of the example. Only in the third case you doubled your profits.

Nevertheless, you should buy the second option solely if the price reached a particular level of support/resistance. Additionally, if a sudden change occurs due to news publication or particular events, then buying the second option will be a wise decision too. Essentially, such a case of price adjustment in the opposite direction takes place. This is why it is supposed to make a profit rather than loss.

There is an alternative way to hedge. You can open the option for an asset other than your main one, over which the insured transaction is performed. As the matter of fact, there are multiple assets for which the price movement is either synchronized or simply goes in opposite directions.

Let’s look at this from the practical point of view. If you have bought a Call option on EUR/USD pair, it is possible to diminish the risks by buying a Put option on USD/CHF. The reason for this is simple – both pairs move quite synchronically.

Summary of the hedging strategy

This strategy requires a substantial amount of experience in the online trading and deep understanding of the financial markets. That is why only advanced traders can use the hedging strategy in the appropriate way. You should not be hurry with your decisions. Therefore, prior to trading the second option you are highly recommended to wait for the price to reach a specific level of support/resistance or wait until an abrupt change caused by significant economic data release.

Forex Binary Options Risk Hedging Strategy

When does a trader become more professional? In many ways, when his main task is not to earn more, but earn with minimal risk. It is at this moment that he begins to interest position hedging strategies.

If you start to understand this issue in more detail, you can find many trading hedging strategies that are considered successful and worthy of attention. Among them you will find locking, i.e. opening the opposite direction of the transaction for the same asset (example: initially unsuccessfully open transaction buy by EURUSD hedged by a deal sell by EURUSD, while the size of the loss is in the “lock” until the moment when it is not possible to close both positions in plus or with minimal loss), hedging asset with a high positive or negative correlation (example: transaction buy by EURUSD insured by a transaction buy by USDCHF; assets traditionally have a high negative correlation), and others, on a principle similar to these core ones.

Other binary options articles

Binary Options Hedging

In this article, ForTrader.org magazine suggests you try another version of a hedging strategy that uses an asset from another market, but similar in nature to the main one. We are talking about binary options on currency pairs. ABOUT the concept of binary options, & lt; / RTI & gt; types of and application, we talked a lot in previous releases, so we only recall that binaries are a simplified derivative financial instrument, similar in logic to “betting” transactions. At the same time, having a high percentage of profit with a positive execution: 80-100% and higher, with a loss the size of the contract is completely lost. In addition, the basis of a binary option can be any other traditional asset: stocks, indices, bonds, futures, metals, including Forex market instruments.

So what does this give us? The basis of a binary options trading hedging strategy is solely the fact of a high percentage of profit, which can cover the losses of traditional trading with the correct calculation of risks. Consider an example.

Using the One Touch Binary Option to Hedge Risks

So, we have an open position to buy at EURUSD 1 lot at a price of 1,35914 with stop loss at the level of 1,35503 (41 points) and takeprofit at 1,36822 (91 points). We opened the deal on the basis of technical analysis (see Fig. 1).

At the moment, the deal is in positive territory and we are confident that the price will move up, however, we do not want to lose the profit we have already made. In this case, there are several options for further action:

  • Continue to hold the position unchanged.
  • Close position with current profit.
  • Set a stop order in the breakeven zone.
  • Hedge a position.

How to work on the first three points, everyone knows, and the choice among them depends entirely on the strategy of the trader. But what does it mean “hedge a position“, Let’s figure it out.

So, we assume that EURUSD will grow at least one more day, and in general with a high degree of probability it will close on takeprofit. But there are still fears of a strong pullback, for example, in case of news release from the Fed in a negative way, so we have a desire save your money.

Fig. 1. An example of an open transaction.

To do this, look first of all at our stoploss. He makes up 41 item, taking into account the deposit, leverage and transaction volume, 1 point at us costs $ 10. As a result, under adverse circumstances, our position will close at a loss 41 * 10 $ = 410 $. With a good combination of circumstances, the profit will be 91 * 10 $ = 910 $. Therefore, when buying an option, we need to win back at least $ 410. Given 90% profitability, we need to buy one-touch contract for 1 day for sale at a price of $ 460 with profitability in case of execution of $ 414.

What do we do as a result? The “one touch” option works in such a way that for any touch of the price of the mark indicated by us, we get a designated profit. At the same time, a stoploss transaction is being closed, therefore, having a loss on a currency pair of $ 410, we get a profit of $ 414 on the option. The difference of $ 4 is taken away. In the case of continued movement and triggering of takeprofit, our profit decreases by the size of the contract: $ 910 – $ 414 = $ 496. In both cases, we remain in the black.

Nuances of using binary options hedging

It is important to understand that using a binary hedge option is only profitable when profit on the main trade is significantly higher than the stop.

Also, existing profits should be considered: if it is higher than your earnings if takeprofit is triggered, minus a hedging position, then, of course, it is more reasonable to simply close the deal. Those. in our case, if the current profit is already 50 points or $ 500, or close to that, then it is more profitable to take profits than to hedge with a maximum increase in output of $ 496.

Also, when working with options, you should include the time parameter in your strategybecause it is mandatory when concluding a deal with binaries. If you are not sure that during the day, as in our example, there will be flat movement, it is better to use the break-even transition, so as not to get two minuses instead of one small plus.

One way or another, as in any other form of insurance, you bear certain risks. It is required to think over options in advance and calculate profitability, especially in transactions with binary options. However in many cases this method is very profitable, especially if you are trying to withdraw the account from the minus with already locked positions.

FORTRADER magazine experts

FORTRADER Magazine is a large team of experts in trading in financial markets. Traders, managers, investors, programmers, testers, technical administrators – we all work for you every day for many years. Sometimes we write articles together, then the whole journal becomes the author.

Hedge the news with Binary Options

Good Day traders,

In this article I am going to explain you a very simple but effective system from which you can make a sure profit using binary options. I use this strategy sometimes, mainly when we have news realises. Where is the problem with news realises? The market always is makes the big move some seconds after the announcement. You can know what time is the announcement but you can’t know exactly some seconds after it.You can know it about one minute later when the economic sites will post the announcement. So, what I do? Let’s assume that we have news at 11:30 AM. I use two monitors. One for the charts and another one for the orders.I was waiting to close the last candle one minute before the news, at 11:29 AM, and in the next candles, the news candle I am looking for buying or selling climax. If the candle starts to be green this means heavily buying activity some seconds after the news, the market will move up.If the candle starts to be red with selling climax this means heavily selling activity and the market will go down. Sometimes we have a correction exactly after this candle and the market goes to the opposite direction but the most of the time the first candle after the news, the news candle as I call it show us the way. To avoid unpredictable conditions like the condition I said above you can do one simple thing. Hedging the news. For doing this you can use two different financial products in the same asset. Spread Trading or Spot FX and Binary options. I take my main position usually with a Spread Trade and I am hedging this position with a binary option contract. Let’s see an example.

Look at this chart. It’s from GBPUSD currency pair. In the blue rectangle I drew we have the “news candle” (the big bullish candle). Now, let’s assume that your max loss you want for the Spread Trade or Spot FX is about 40$ and this will be your stop loss. You take a trade with 1 Lot or 10$ per pip. When the news candle starts to have buying climax the market shows us the way. You open your buying position. The same time open a binary option contract in the opposite direction, take a 50$ put. So,

Scenario 1: The price moved up about 35 pips and you made 350$ from the Spread Bet but you lost 50$ of the binary option contract. Total profit 300$.

Scenario 2: The first reaction of the market was false and it moved in the opposite direction. Your Spread Bet stopped at 40$ loss (stop Loss order) but you won the binary options (payout 70-80%) can give you about 40$ profit. Your total profit is 0$.

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