In brief, hedging is the process of mitigating, preventing and controlling risks. For instance, an insurance cover is a hedge against disasters. In binary options trading, binary options hedging is best illustrated by going long on an asset and short on a competing asset. It’s unlikely that the value of both assets set to move towards the same direction at a given time, Thus, one will make a profit and the other a loss and this means you get a moderate gain or loss respectively. Binary option hedging is popular in a volatile market, and it maximizes profits while minimizing the losses.
How Binary Option Hedging Strategy Works
Straddle is one of the most common binary option hedging strategies. It involves identifying the highest and lowest levels of the price of an asset during trading. The two binary options for this case are making a CALL on the highest level and a PUT on the lowest. The ideal period is when the price moves symmetrically. Depending on the chances, traders may bet on two options moving in the same direction and not the opposing directions. This works when the price movement trends strongly.
Or, the trader may choose to involve a pair of currencies. The currencies should move in opposite directions. The price of one asset will rise when the other lowers. This puts the trader in a position of earning profits from either of the assets.
Hedging can also involve a binary touch option. The inherent risk of a one-touch, touch or non-touch option is high. But, the gains can get up to 600 percent. This strategy works best when the market is trending strongly. So, when you buy a pair of options, you will get two trigger values of a single financial asset’s price. Three results await you; profits on both positions, losses on both and loss on one and win on the other.
Traders may want to purchase binary options that expire in the same or different periods when coming up with a hedging strategy. For instance, based on the dynamics of the market indicators, the trader can predict a rise or fall within a given time. Thus, the pair of binary options purchased is likely to expire in two different periods.
The rule of the thumb in choosing a binary options hedging strategy is to make close observation of the market before investing. This may feel like betting, but; it should be based on analysis as opposed to luck. The hedging strategy helps mitigate the losses while increasing the chances of making profits.
Other Tips for Using the Binary Options Hedging Strategy
– The options should have the same expiry period
– You can hedge when the first option is out-of-the-money, and the price continues to go towards that direction
– You are at liberty to hedge different amounts
– To restrict the loss percentage, you can buy an option ahead of the other. Then, you can gain the money from the first option and invest it in the second. This boosts the profit percentage.
Choosing the Best Binary Options Hedging Strategy Broker
After creating an account with a legit trusted broker, you can start trading online. Ensure you find a broker who you can trust. Also, the binary options accounts should have the features that allow hedging. Liaise with your broker to know whether you need to upgrade your account to gain such functionalities.