Summary of Hedging Strategy that can be useful for you
One of the most excellent strategies to earn money using binary options is risk hedging. In this case, it is possible to minimize all of the risks every trader has on the asset.
In case of any mistakes in the trade, the trader is able to adjust his work plan in order not to lose all his capital as a whole. This is a very common method of money management work, which in its due course time helped many people working in the financial markets.
How to explain hedging on a real example of work?
Example: at 12:00 p.m. a trader buys a Call option on EUR / USD tool at a price of 1.300. Purchase amount – $ 100. Expiration will happen by the end of the day – 24:00. If there is a positive outcome (price by 24:00 will be greater than 1.300), in this case, the trader receives $ 170. If the result is negative, the trader will receive a total sum of $ 15 by way of compensation of entire transaction (that is, exactly 15%).
However, the price has become higher already at 18:00. Naturally, all of this can adversely affect the expiration, which is to occur only by 24:00. This suggests that, in general, an option may start falling, and fall quite actively. The trader has to understand this on their own as a sharp rise in the market does not imply anything positive, if the Call option was bought.
What is to do?
In this case, you must purchase a Put option. That is, we create a sort of a corridor between the prices as a whole. We set the minimum and maximum price that can be up to 24:00. Why is this necessary? This is a hedge!
What is the outcome of working with such a corridor?
- EUR / USD tool by 24:00 is lower than 1.300. First Call Option loses, while the second Put Option receives a positive outcome. The total payment from the broker will be exactly $ 185. Totally $ 200 was invested in two options. The loss at $ 15 is seen, but without the second option, which brought profit, the loss generally would be $ 85;
- EUR / USD tool is in the corridor shown by trader. In this case, both options are successful. $ 200 is invested, the total payment of the broker – $ 340. Profit – $ 140;
- EUR / USD tool is higher than 1.300. In this case, the first option wins. The financial situation with the first case is repeated.
What did risk hedging do?
If a trader has bought the option, bet on one of the trends and the result is the opposite, the opposite option must be purchased.
Before you perform this action, you must analyze the market very well. Market behavior is unpredictable, it is necessary to transact only in those moments when it really can make a profit.
How to analyze?
To use the economic calendar, view all the significant events, giving them a worthy consideration.
- It is possible to hedge one trading tool with another
- Psychological comfort
- Additional time to consider the current situation on the market
- Decrease in the number of loss-making positions
- Not all brokers and trading terminals allow hedging positions (for example, at trading platform MT5 opening divergent positions on one trading instrument is banned)
- In many cases – an increase of brokerage costs
With hedging many traders make their fortune, and you too will succeed. Good luck!
That’s all for now. Got any questions? Just ask the expert!