One of the consistent criticisms of binary options has been the lack of a low risk binary options trading alternative. The very nature of the contract stands essentially as an all or nothing enterprise in which the trader has effectively a fifty-fifty chance of losing his or her entire investment at contract outset. Here we explore a few ways to mitigate or otherwise reduce the riskiness of trading contracts of this type.
Alternative Strategy 1: Binary Hedging to Reduce Loss Risk
Many traders have opted to try to reduce the riskiness of these hybrid assets by opening positions initially and then closing the position once an initial (favorable) gap between the strike price and the current spot price has opened. This allows the investor to create a full or partial hedge of the initial trade resulting in a risk / reward profile that pays out a high return if the expiration price lands in the middle (the area between the initial and hedge strike prices) with a small loss or a push at any other price. This strategy requires double the investment capital of a single position and has the impact of reducing the overall probability of success but at the same time dramatically reducing per trade losses. Confident traders many times open such a position with the plan to close it off prior to trade lock out but choose to leave the contract open if it is deep in the money. A trader with a deep in the money asset has the luxury of that choice.
Using Bonus Cash to Reduce Risk
A second means of low risk binary options trading involves taking good advantage of the incentive account credits many platforms offer. Most brokers offer some form of either initial or long-term activity incentive to induce new clients to make their first asset purchases. Smart investors use this bonus cash wisely by making a series of smaller trades (usually hedged to double the volume) to slowly consume it. By generating enough trade churn (investing the money in the account over and over again) the typical restrictions on withdrawals of bonus cash can be lifted with minimized losses – again particularly if the hedging strategy above has been employed as well.
Trading Strategy 2: Sacrificing Yield with Early Closure or Floating Pair Binary Options
The last ways an investor can take advantage of low risk binary options trading comes in the form of either closing positions early or by trading a floating pair binary options contract instead of a standard one. Some brokers allow investors to close in the money contract early – at a reduced yield. While the profit on this sort of transaction can be a bit lower, the advantages of quitting while you are ahead can not be understated.