The introduction of binary options has opened up new avenues in the trading arena. The binary options are becoming popular by the day for the reason that there is calculated and predetermined risk associated with it. Just as the name suggests, the binary options trading has only two possible outcomes: profit or loss. Either the trader gets everything or he does not get anything.
The binary options trading can be described as a trading contract where the amount to the paid at the fulfillment of a condition or price movement is predetermined and the payoff is made at the time of expiration. Whether the payoff will be made or not depends on the condition wherever the trade is "in the money" or "out of the money". Here the range of the price difference is not significant and even if the contract is "in the money" even by a single tick it counts for a payment. Similarly if the trade is "out of the money" by a single tick the trader gets nothing.
Various traders follow different strategies to make their trades profitable. One such strategy or technique followed by them is the hedging binary strategy. Here we would discuss this strategy:
What does hedging mean?
Hedging is a strategy that is employed by various traders to reduce the risk of investment by various methods like the call and put options, future contracts or short selling techniques. The hedging strategies are designed to reduce the potential volatility and risk of a portfolio or an investment by reducing the risk of loss. Basically it gives the benefit of locking the existing profit. Hedging strategies are most often used while trading forex and binary options are also used together with hedging strategies to minimize the risk of loss.
For quite some time now, binary options have been used for day trading. Although it may sound strange but a trader who has sufficient knowledge of binary options can use it for partial hedging. It also gives an opportunity to reap in more profits. Wise use of the call and put options can reduce the risks to a greater extent. In fact double profits can be made if the binary options are executed properly.
As a trader you know that most of the binary trades expire either at the end of the day or on hourly basis. If the price of a particular share is say $ 20 and you can earn a profit of $ 200, now if the prices go up as your prediction, within the hour before expiry, you have the option either to hold the share or sell it before expiry. The decision of holding back the share depends on many factors. The future market depends on news and other sources of information which helps the traders analyze the market.
Now in this particular case, you can either use partial hedging or complete or full hedging. Full hedging assumes selling of all the shares in this scenario. This would bring in the profits at the given moment. Partial hedging charges holding back some shares while selling a part of them. Although there is some risk attached as the trade to a certain amount is still open, but loss of risk on the shares sold is reduced. If at the time of expiration, the trader's prediction is correct, he would still make the profit but without the involvement of any risk.
Proper usage of binary options strategies in such a hedging strategy helps the traders. Some people might think that the hedge binary is difficult to understand and implement, but it is not so. It can be used by anyone who uses the options correctly and earn some extra money.