Easy How To: Use Hedging With Binary Options
Many subtle aspects of Binary Options often go unnoticed by Binary Option traders. The most interesting perhaps is that there are many ways to trade Binary Options in a manner that reduces risk. One of these is hedging.
The principle is simple: Strengthen your position if you are right and hedge it if you are wrong. Let’s see how this works. In the images below, the GBP/JPY succeeds in a breakout in CASE A and fails the breakout in CASE B. Using your Binary Options trading account, at www.StartOptions.com for example, you would place a CALL Binary Option trade at the moment of the breakout in both CASE A and CASE B. In CASE A the breakout succeeds and you reap an 85% profit, say $85 if your trade stake was $100. However in CASE B the breakout fails. At this point you have 2 choices: lose $100 or hedge your trade. If you choose to hedge your bet by placing a PUT Binary Option trade when the breakout fails, the trades now cancel each other out resulting in a $15 loss instead of a $100 loss(win $85 – lose $100 = $15).
So let’s assume that 50% of breakouts succeed, in a pessimistic world. Under this assumption you will win $85 (50% of the time) and lose $15 (50% of the time) which makes a steady income of $70.
One interesting comment on Binary Options hedging: don’t try this with your conventional Forex account…conventional Forex accounts don’t allow you to hedge on the same instrument…if you try it you will find yourself selling off you own position!
The principle is simple: Strengthen your position if you are right and hedge it if you are wrong. Let’s see how this works. In the images below, the GBP/JPY succeeds in a breakout in CASE A and fails the breakout in CASE B. Using your Binary Options trading account, at www.StartOptions.com for example, you would place a CALL Binary Option trade at the moment of the breakout in both CASE A and CASE B. In CASE A the breakout succeeds and you reap an 85% profit, say $85 if your trade stake was $100. However in CASE B the breakout fails. At this point you have 2 choices: lose $100 or hedge your trade. If you choose to hedge your bet by placing a PUT Binary Option trade when the breakout fails, the trades now cancel each other out resulting in a $15 loss instead of a $100 loss(win $85 – lose $100 = $15).
So let’s assume that 50% of breakouts succeed, in a pessimistic world. Under this assumption you will win $85 (50% of the time) and lose $15 (50% of the time) which makes a steady income of $70.
One interesting comment on Binary Options hedging: don’t try this with your conventional Forex account…conventional Forex accounts don’t allow you to hedge on the same instrument…if you try it you will find yourself selling off you own position!
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