Hedging Binary Options

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Applying hedging techniques to binary options

Binary options profit making instrument provides you with the benefit of being able to use a hedging technique in your money making strategy. What does this mean?  It means you have the ability to place your capital on both a ‘call’ and a ‘put’ option on the same underlying asset. Now this might seem ridiculous at first sight because of the absolute certainty that only one position will close ‘in the money’! However, there is more than one way by which you can use the hedging technique to preserve your capital as well as exploit from profitable opportunities.

Protecting your capital by hedging a position

The hedging technique can be applied as a defence against losses where the probability that your contract will expire ‘in-the-money’. Adopting this method of defence means you have to purchase two contracts, i.e., a call and a put option at the same or as close to the same entry price as possible at the moment of entry. Both positions would be covered. We could call this the ‘cuts both ways’ hedging defence technique.  Logically, therefore, one position will close out-of-the-money and one position in-the-money with the effect being a consolidated mutually assured defence. The net result meaning you will have put yourself in a position to recoup the losses on the position that expired out-of-the-money.  That’s a real benefit for you.

Applying hedging techniques to increase profits

The defensive strategy described above is just one technique you can use to hedge around your trading capital in binary options.  Hedging can also be applied to effectively neutralize risk completely and to ensure you make a profit from high probability situations.

To explain what is meant by this let’s consider ‘’trading range breakouts’’ by way of an example. When the market price of any given asset lingers for a period of time within a tight trading range, we are looking for the moment when the price breaks out of this range. It will break out of it in either direction of course, and this provides a highly likely probability of a trading opportunity by which you can make a profit. Placing your money on a contract in the direction of the breakout (i.e., above or below its former tight price range) means you are using the momentum created by the price breaking out of its range. This is considered an ideal prospect for making profits by short-term binary options traders. You should also be alert to the very real possibility, that although genuinely a break out, it might have a false momentum. If there is no sustained momentum the asset price will reverse quickly after initially breaking out of tight range.

Be it a put or a call, it is possible to mitigate against losses by hedging the situation pertaining to your particular contract when the momentum reverses and the price returns to the number when you entered into the contract. This technique neutralizes, or at worst tightly limits losses on those break out contracts which expire out of the money.   Asset price break out movements represent an excellent probability of success.  This means there is less of a requirement to actually hedge your position, but it can be an excellent prophylactic technique against any unfortunate turn of events that might render you at a loss.

Contract entry moments are crucial or hedging positions

Hedging is a tactic to enhance your money making strategy.  It will cut down your losses, lift your profits and embellish your binary options trading experience overall with knowledge tyo apply in future.  Success still hangs on how close to the first contract’s strike price for an asset that you make the hedging contract. Otherwise you run the risk of both positions closing out of the money. Wisdom dictates therefore, that hedging your positions will be most effective when a momentum ceases and reverses but you must be ready to take immediate hedging action to protect yourself from incurring losses.

Closing Comments

Hedging is a trading concept used to minimize losses when trading financial markets.  To hedge in binary options is to open a position opposite to a current position therefore having both call and put options open on the same financial instrument.  A binary options hedging strategy is particularly useful when you expect price activity to move in a direction that you are certain about.  This predictable situation often presents itself when important economic information is due to be released. Timing can be crucial. Because sometimes hedging will only succeed for you if you have entered the contract/s required to balance those positions contracted initially. Last but not least, it is advisable to set your contract duration long enough to leave you with time to use a hedging strategy effectively.

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