Binary Options Hedging Strategy
There are a multitude of different approaches which can be adopted by anyone wishing to trade in binary options. Not all of these tactics will work for everyone which is why the binary options hedging strategy is an excellent addition to any trading method. Simply put, hedging helps someone to lower the chance of a bad trade by placing alternate trades. The outcome of the combination of trades should be positive whilst covering any potential losses. It will not prevent a trade from going bad; this is impossible as there will always be some trades which do not go as expected. However, what it will do is offset the losses of those trades and enable a profit to be created. This can work in any type of financial market and has been a common approach for many years. It is worth noting that using a binary options hedging strategy will result in smaller profits than some other strategies; but they should be more consistent.
Binary Options Hedging Strategy – The Straddle
This is a common approach to trading although it can be difficult to locate the right parameters. This is because it is necessary to utilize two different strike prices with only one asset; this is done by purchasing two different contracts.
To effectively use the binary options hedging strategy it is necessary to locate the highest point of an asset and the lowest. These levels can be established by looking at a chart showing the movement of a specific asset over a given time frame. Assuming the asset has been moving up and down it should be possible to purchase two trades simultaneously; one assuming the price will go up and one with it going down. Each of these trades should ideally generate enough funds to cover the loss on the other trade and generate a small profit. Alternatively it is possible to purchase a trade when the price hits the high point and a second trade when it hits the low; assuming it will move between the two frequently.
There are two potential outcomes:
By waiting for the price to move before using the binary options trading strategy it is possible for both trades finish in the money and a good rate of return to be generated. Of course, there is a risk that both trades will end out of the money.
The alternative and reason for adopting this type of strategy, is that one trade is successful and one is not; this will either result in a small overall profit or loss; depending upon the cost of the trade and the rate of return.
Alternative Binary Options Hedging Strategies
A very effective way of applying the binary options hedging strategy is to use currency pairs. It is worth noting that the approach can work with different assets as well as the same one.
For example, it is common for the British Pound versus US dollar to move in the opposite direction to the US dollar and the Swiss franc. This binary options hedging strategy can be applied as soon as you see that both currency pairs are moving consistently. The idea is to purchase two trades for the same direction. As these pairs move in different directions it is highly likely that one of these trades will be successful and should generate enough of a profit to cover the cost of the other trade whilst generating a profit.
If you have found two currency pairs which are both increasing or decreasing in price then it is possible to purchase two trades. They should both be purchased simultaneously; one in each direction. It is very likely that one of the transactions will experience a small loss whilst the other achieves a good rate of return. The result will be a small overall profit. It is worth noting that this technique is most effective in a market which is moving predictably and fairly slowly. Massive and unpredictable movements can leave you looking at a loss on both trades.