To be a good trader it also means you have to manage the risk effectively. You can see different techniques that can teach you that, some are simple and some are hard but i would say that the best are the ones that you can understand. So let us take a look at heding strategy. Heding is a position that is looking to gain profit or prevent loss from trading. So as you can see this can protect you from losses. But how to do that? To create an off-set trade position, which means, a call is hedged by put and put is hedged by a call. Its a bit harder to create them in binary options but still possible.
EXAMPLES OF HEDGING
Example of hedging with one binary options platform:
|
Position
|
If uptreding
|
If downtrending
|
|---|---|---|
|
$100 Call
|
$170
|
$15
|
|
$50 Put
|
$7.50
|
$85
|
|
Cost Of Position
|
-$150
|
-$150
|
|
Return
|
$177.50
|
$100
|
|
Profit/Loss
|
$27.50 (18.3%)
|
-$50(-33%)
|
Table is based on a binary options platform that gives an average of 70% on ITM(in the money) trades and gives you 15% rebate on OTM(out of the money) trade. It is true that the profit is less but you have limited your losses since you have 50$ instead of full 85$.
There are different binary options platforms so let us take a look at another example where they give you 80% for ITM trades and 0% for OTM trades. Since we do not have any insurance for out of the money trade we need to make it up ourselves by putting more. Here is example:
|
Position
|
If uptrending
|
If downtrending |
|---|---|---|
|
$100 Call
|
$180
|
$0
|
|
$60 Put
|
$0
|
$108
|
|
Cost Of Position
|
-$160
|
-$160
|
|
Return
|
$180
|
$108
|
|
Profit/Loss
|
$20 (12.5%)
|
-$52 (-32.5%)
|
TIPS FOR HEDGING
- To try out some basics i would say is to buy positions as close as it is possible which means we can assume both positions will expire at almost the same time.
- It is better to follow this strategy if you also follow the trend.
- Advanced traders can use two position that will not expire at the same time. For example, if you think that market will go up at the end of the month but you also think that it will go down within following weeks. Then you should buy a position to expire at the end of the month and another position to expire in one week. This way actually you can make both trades in the money.
WHAT CAN BE WRONG?
Well you are limited because of such strategy with the profit since you want to have security for losses. To be honest that is the only negative regarding this strategy unless you are satisfied with less profit but limited risk aswell.
WHY IS IT GOOD?
The answer to this is simple, it limits your losses which means that your risk is decreased.