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A Guide on Hedging Binary Options

Author Zizzur Staff. Published on August 20, 2011 - 8:04 pm (535 views — 387 words)

Hedging binary options is a form of binary options strategy that is often utilized by traders so that they can either offset their losses or improve their maximum gains. In essence, it is done by purchasing two contracts that contradicts each other. As binary options has a fixed payout system, you may already compute the risk as the money that you put in a contract will be the only one that you can lose. What makes this strategy great is that you can even further lessen your losses this way. Here are several thing that are worth knowing about the hedging binary options strategy.

The advisable time to utilize the hedging binary options strategy is when you believe that the price of the instrument that you invested in will not finish make it to your initial projection. In most trading platforms, there is a 10-minute mark before the expiration time wherein you are prohibited from making trades anymore, so you have to make up your mind quickly and decide whether you should use this strategy or not. For instance, you have initially purchased a $100 call option contract with a 75% payout. Twenty minutes prior to the expiration time, the value of the asset is still nowhere near the strike price so you decide to get another $100 put option contract. Through this, you will certainly get $175, and if you consider the $200 cost of those two contracts, you only have lost $25. The $25 loss is a lot more manageable compared the $100 loss that you have to suffer, if you didn’t bet on those two different contracts.

The hedging binary options strategy may also be employed to earn even more gains while lessening your losses at the same time. This can be achieved by purchasing two opposing options that will result an in-the-money-range. What you have to do is place bets on two conflicting directions, but they should have strike prices that are near and not equal to each other. Utilizing this strategy will let you earn bigger profits if the price of the underlying asset is within the range of your two contracts. Furthermore, if ever one of your option contracts did not make it to the strike price, the other one should still be able to reduce the impact of the loss.