The Strategy of «Options Hedging»
In addition to the classic indicator strategies and systems of technical and fundamental analysis of binary trading, logical approaches to trading are also used. This is possible thanks to the adaptable architecture of the binary option on the financial market. Today we will look at a logical approach to trading – the “Options hedging” strategy. This logical approach to trading on the options market gives traders a wide range of possibilities, the main ones of which are the minimization of trading losses and the gaining of additional volumes of revenue. This strategy does not require complex calculations and it is a simple way for beginners to quickly improve their trading results.
Hedging using binary options – technical requirements
To effectively use this logical trading system, we will require a terminal with specific technical trading conditions and services. Among those conditions for the effective application of the system, we must point out the following:
- Precise quotes with quick updates
- A selection of underlying assets
- Non-stop trading mode
- A chart analysis tool service
- Convenient displaying of trading bets on the asset chart
- High-speed processing of bets
- Contracts with minimum expirations – 1 minute
- The minimum trading condition parameters
Access to this list of technical tools for working on the binary market can only be found on high-tech, specialized platforms from large brokerage firms. As the main contender for the title of the most efficient terminal, we recommend the product from the Binomo broker. This professional terminal offers the following service tools for trading:
- The most accurate market quotes with a fast update mode
- More than 80 positions of underlying assets
- The availability of a non-stop trading format
- A set of chart tools for technical analysis
- Display format for registered bets in the form of price levels
- Order processing in 1.7 ms
- Expiration range for trading contracts from a minute to a day
- Trading condition parameters – an initial investment from $10, the amount of a bet from $1
The «Options hedging» strategy
So, the professional term hedging is nothing more than simple trading bet insurance on the binary market. It uses a quite logical approach of manipulating market contracts. We will look at two methods of hedging using binary options.
In this method of using the logical system, the trader registers a bet, the forecast for which can be formed on its basic operating strategy on the market or just randomly. Take for example an initial bet UP. After opening a position on the market, the trader observes asset price movement towards the trading forecast – after which you can then register a hedging trading position with a binary bet DOWN. On the trading chart it might look as follows:
Use bets with expiry periods that will end at the same time. What we will get after the bets expire, in this case, is two possible outcomes:
- Upon the expiration of the trading contracts, the quotes are between the price levels of open positions – as a result, the online investor will receive a positive result on both contracts. We’ll take the average profitability for a position at 85%. As a result, the trader will receive trading profit at the level of 170%
- The asset price quotes upon expiration are higher than the level of the hedging contract or are below the level of the main trading bet – in this case, the trading statistics will have a negative result – losses at 15%.
According to our testing of the approach, in practice the possibility of obtaining the first embodiment of options hedging expiration is no less than 80%. Thus, insuring your position has a fairly high level of efficiency. It should be noted that the losses at 15% possibility as opposed to losing the full amount of the bet is also an excellent result in terms of reducing trading risks.
In this format, hedging using binary options is used as a way to minimize trading losses when trading on trends. The main market situation in which this logical method is used in practice occurs as follows.
When trading on the breakdown of the trend level, the investor registers bets DOWN, but, in spite of the forecast, the quotes do not start building a steady downward trend and return to growth. In this case, upon the price reaching the trend level, a hedging contract is registered:
Thus, upon expiration, the market participant will receive losses at 15% taking into account the average rates of return on bets, and will save their operating capital from the total impact of critical trading losses.
Hedging using binary options can be used by investors as an independent trading system with a high level of efficiency, and as an additional logical tool to avoid losses when working on classic technical trading strategies. In any case, the application of the “Options hedging” strategy leads to good final trading results on the binary market.