• Category: Strategies

How to Effectively Apply the Hedging Strategy for Binary Options

Even with the best market analysis, it is not always easy to predict the direction of price movements. The hedging strategy for binary options allows you to mitigate risks especially when there is increased price action around an asset. This strategy entails taking two different trade positions; this is quite different from the straddle strategy that involves taking similar positions for the CALL and PUT trades.

How to Effectively Apply the Hedging Strategy for Binary Options

What’s really important to note is that to effectively use the hedging strategy, you will require adequate time to be able to take the trade positions that are necessary to even out the losses that one of your trades could incur. You also want to have considerably longer expiries to effectively realize the benefits of the hedging strategy. In contrast to short expiry periods, longer expiries allow you the freedom to establish the direction of the markets to increase the profitability of the successful trade position whether that is a PUT or a CALL position.

Hedging allows you to leverage fleeting price actions in an attempt to lower risks and maximize on profit potentials. Say you take a CALL option position on Apple stock at a strike price of $97. Let’s assume this trade closes in the money at $99. Although you might want to take another CALL option trade, you may not be too confident that the price of Apple stock will continue to be on an upward movement. The hedging strategy will come in handy in such a situation; you can take both a PUT and a CALL option price on Apple stock at the same time. This way, you can protect your initial investment against the potential losses that may arise from either trade positions.

 

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A Step-By-Step Guide To Applying The Hedging Strategy

Step 1: Within 15 minutes of a trading session, select a strike price that is close to the top or at the bottom of a market trend.

Step 2: Allow for the price of the underlying asset to move up or down, depending on the market trends.

Step 3: Just prior to the lockout, monitor the market trends to identify a second trade position that will help to hedge against potential losses. You could take an opposing position or one that is concurrent to the initial position depending on the price movement of the underlying asset. It is perhaps best not to take a second trade position if your first position is substantially deep in the money.

Step 4: You may choose to leave your position as it is and move on to the next trade if it is considerably out of the money. Alternatively, you could carefully take two more trade positions to maximize your profit potentials.

Step 5: Taking an opposing trade could help in hedging your investment from risks especially if the price of the underlying asset stagnates i.e. it moves neither up nor down.

To make the most of the hedging strategy, it is best to take a trade position early on in the trade session so you can get a better strike price. It’s not usually feasible to lock in a good strike price when the trend is already too drawn out.

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