Hedging — the insurance strategy aimed at minimizing potential losses from the underlying transaction. It is applied in the case of force majeure in foreign exchange markets, because of which the price reversed in the opposite direction.
Hedging on binary options
Hedging on binary options is one of the main strategies of those who care not only about maximizing the income, but also about the ways of retreat. One bad deal can negate a successful profit from previous operations, whereas this strategy allows to insure unprofitable transaction in time, reducing the level of loss.
Let’s show the principle of the strategy implementation on the example:
- At 11.00 you buy the option (Call) with the underlying asset of EUR/USD at the strike price of 1,3600 (base price of the purchase option) at expiry time (end of option) at 21.00. In case of successful outcome of the transaction (the price will be higher by the expiry of buy level 1,3600) the income will amount to 170% (e.g., 170 US dollars.). In case of failure, the broker offers a 15% or $ 15 compensation.
- At 16.30 the price has reached the level of 1.3700, which is convenient to you. But by analyzing the trend, you understand that by 21.00, the price may turn around and fall below 1,3600. Early closing of an option is impossible. So you need hedging on binary options.
- Open a new position in the opposite direction (Put) at the price of 1.3610 for the same currency pair and in the same amount. Now by 21.00 there are 3 possible scenarios:
- the price of the asset is below 1,3600. The first option has lost, the second won. Therefore, by investing $ 100. (or rather 200 for both options) the payment will be 170+15=185 dollars. In other words, instead of losing 85 dollars you lose only 15;
- the price of the asset is between 1.3610 and 1,3600. Both options won, the profit will be 140 US dollars;
- the price is above 1.3610. Option one won, second lost. The loss will amount to $ 15 instead of 85.
At first glance it may seem that hedging on binary options is not so favorable — because of the 3 options 2 bring to a loss. However, it’s all in the behavior of the market. This strategy is aimed at minimizing the loss and apply it when you are almost completely sure the turn of the market. Besides, opening a second option, you may get a chance to increase the income, since the theory of probability the occurrence of the event in the second case, a minimum of 10%. Let this option seems to be partly illusory, but at some point you will cover the loss.
Possible hedging on binary options on different correlating currency pairs. Select the broker, open a demo account and hone your skills in binary options trading along with Investlb.com!