Risk reversal strategy is a financial binary options technique that significantly reduces trading risks. Sometimes, it is referred to as a hedging strategy, but; it is more arbitrage and necessitates the purchase of PUT and CALL options at the same time.
This strategy is able to yield profits without putting the trader’s investment at risk. But, it is not the kind of approach that newbies are encouraged to use as it involves complicated considerations during use. Savvy and experienced traders, however, prefer the risk reversal strategy when making binary options because it guarantees profits in the end.
How does the risk reversal strategy work?
When you choose to use this strategy, you first need to identify assets with dominant up-trends or downtrends. The majority of traders will readily place a CALL option on a bullish asset. But, you need to consider the PUT option as well to ensure that you make a profit. You, therefore, open two opposite positions on the same asset as this reduces chances of getting at a loss.
The bullish value of the asset can activate if you purchase an call option and then, simultaneously, sell a put option. You need to make sure that there are three constants; the amount invested, the item and the expiry time. Thus, you need to ensure that the three are the same for each wager.
So, you will execute the trade with the chosen asset but spend barely anything like the cost of the call option is equal to the amount you receive for selling the put option. When the asset’s price rises, the call option will go even high, and; simultaneously, the put option will decline to near zero at the expiry period. Thus, you will get profits from the CALL option and get a zero refund from the PUT option. This means that you will have traded your money without taking any risks.
The profit-friendliness nature of the reversal strategy in binary options makes it a favorite for many experts as it allows them to earn profits without necessarily having to go at a loss. Then, the strategy’s profit potential is unlimited.
Trading using the risk reversal strategy
Now, how do you put the risk reversal strategy into use? Well, the risk reversal strategy is worthwhile as it allows traders to open multiple trading positions on the same asset. It also helps in hedging trades. The trader purchases a CALL option and sells a PUT option if the market is bullish. Then, when it is bearish, the trader buys a PUT option and sells the CALL option, and this activates the hedge.
To benefit from the risk reversal strategy, ensure your brokerage account supports the processing and editing of pending orders. So, when you want to put the approach into practice, you should check whether your broker offers a full sell feature. This is an important function when selling the PUT option back to the binary options broker. Some brokers may need you to upgrade your account to access such features.