What is Hedging Strategy
Hedging is an innovative strategy which in binary options entails using two opposite directions on a trade simultaneously. Hence, a trader would use both the call and put options at the same time with the aim of reducing the chances of a loss on a trade while increasing the chances for profit. Hedging is most commonly used in the area of currency trading but it can be used in any asset class. The technique has quickly gained in popularity because it is relatively easy to understand and implement.
Hedge Your Trade!
Hedging your options, therefore, allows you the chance to profit both from your original option and from your hedge option. This generally happens when there is a large difference between the strike point of your original call option and the strike point from when you placed your put option. Of course there are times when you are certain that your option will end up in the money and that hedging may not be needed. However, it’s a good strategy to use when there is a large difference in your two strike points although it can be used sometimes when that gap is quite small.
Hedging strategies are especially useful when an increased price action on an asset is expected but there is uncertainty as to which direction it will take. This usually occurs when important economic information is due to be released. Quite often the markets have some anticipation of how close to the forecasted figures the news will be, but they can also be taken by surprise. Hedging can also be used to minimize the effects of a losing trade. Undoubtedly, winning one or two of three trades is better than winning zero of one. Although hedging has occasionally been perceived as being counterproductive since it involves investing capital in a losing position, by going in early on both sides gets you a better deal in terms of the strike price which you won’t be able to secure after the trend has fully emerged.
The main factor that will determine how successful you will become at utilizing hedging strategies is learning precisely the optimum moment to execute them. You should keep in mind that the financial markets can experience high levels of volatility that can generate serious price surges with practically no warning whatsoever. Such events can cause profitable binary options to transform into losses in just a moment. In addition, hedges will only work if you have enough time to enter the trades required to balance the losses incurred by one of your initial trades. It is important to set your expiration long enough to give you the time to enact your hedging strategy appropriately. Trading binary options with a regulated broker such as Banc de Binary gives you the freedom to do just this. Depending on the confidence you have in the trend continuing all the way to up expiration, a larger sum can be placed on this second trade.
For sophisticated traders, hedging can be a wise strategy on many binary options trades. Novice traders should remember that it is best not to go into every trading situation looking specifically to hedge. It is important to learn in depth how hedging strategies work and how to manage these correctly. If understood and used appropriately, hedging can be an enormously profitable strategy.