A Winner's Guide: Hedging Trades Is the Holy Grail
Binary options are new to the financial markets. Many strategies have been developed for trading, based on the signals of certain indicators, analysis of patterns or other patterns. Each of the approaches is effective to a greater or lesser extent, this can be judged by the ratio of the number of profitable and unprofitable transactions.
The process of full-fledged trading includes not only the purchase of options, but also hedging - insurance of open positions in order to reduce risks. If you plan your work correctly, the trader will always be in the most advantageous situation.
Binary options as a financial instrument are very insidious: they attract with their simplicity, but at the same time, investors underestimate the risks. As a result, the deposit was lost and complete disappointment.
Hedging is an effective way to minimize losses. It is usually used to reduce losses or hedge open transactions.
They hedge options purchased from one broker or several. The main task of a trader is to simulate the optimal result of a series of financial transactions within one or several accounts.
There are many recommendations in which cases it is worth using hedging and in which cases it is not. The market entry point is of great importance for this.
A win-win option in binary options
The trading conditions of a number of binary options brokers provide for the return of part of a lost bet to the client. However, if the option is in the money, the income will be slightly lower than that of competitors who take the entire amount of the loss.
Some companies guarantee a profit of up to 100% of the invested funds. Refunds are made in the amount of 5 to 50% of the contract amount. Theoretically, if you purchase two options with different directions from such a broker, the trader will make a profit no matter the outcome.
Example No. 1.
Broker1 offers a return of 100% of the bet amount. If the forecast turns out to be incorrect, no compensation is provided.
Broker2, in case of an unsuccessful transaction, returns 15% of the invested funds; in case of a successful transaction, the profit is 85%.
Having concluded multidirectional transactions, we get the following result:
| The price has increased | The price has decreased | |
| Call – $50 (100%/0%) | 100$ | 0$ |
| Put – $50 (85%/15%) | $7.5 | $92.5 |
| Total bet amount | 100$ | 100$ |
| Total | +7.5$ | -7.5$ |
Obviously, there is no special effect from hedging in this situation; the overall effect turned out to be zero. For this technique to make sense, the broker must not only set a profit of 100%, but also return at least 5% on a losing bet.
An investor who studies the trading conditions of various companies will find that there are brokers paying 100% of the return on long-expiration options.
There are many intermediaries in the market, this is clearly visible from the difference in established payments. It is important to choose not just a broker with very favorable conditions for hedging, but also a reliable company.
There are many brokers, but it will be difficult to find a trustworthy organization that pays up to 100% for a correct forecast and at the same time returns part of the funds from a losing position to the client.
The list of brokers paying up to 100% of the bet includes Alpari and Binary.com . Up to 50% is a return on unsuccessful contracts from Binomo and Binarium .
To consider the following example, we select classic “higher/lower” options. We will hedge positions opened with different brokers on the same trading asset.
Recently, options of the “0-100” type have become available to traders. As the name implies, if we catch luck by the tail, we will return the bet with a profit of the same amount or lose it entirely. These contracts are convenient because the investor himself determines their expiration time. The payouts, expiration times, and compensation for the two bets that are sides of the hedge must be adjusted accordingly. Putting “0-100” on one side of the scale, if you are unlucky, the investor will lose money, but if the forecast is correct, he will claim interest on the refund.
Features of the “0-100” option:
- Income and loss are always 100%;
- quotes - 4/2 decimal places;
- minimum bet - 1 USD/1 EUR/1 RUR/1 UAH;
- expiration time - 1 hour-7 days;
- early closing option - no
Trading assets must be volatile pairs. The expiration time directly depends on the “refundable contract”, which is 4 hours. The “0-100” option “adjusts” to it.
Two bets, one Put and the other Call, are opened simultaneously. Result: either a trading result of zero or an income of 5%.
Main reasons for failure
Hedging is not always a panacea, here's why:
- different brokers have different quotes;
- if trading is carried out before the release of important news that causes “waves” in the market, the trader simply does not have time to place two bets at the same time;
- The profit margin is small, the deposit will grow very slowly. In addition to hedging, forecasting techniques must be learned;
- The account of one broker will begin to gradually decrease, and the opposite for the second. There may be a commission for depositing and withdrawing money. Weigh the pros and cons of working with companies that interest you.
We adapt hedging to specific conditions
The strategy is successfully applied in various variants, fulfilling the assigned task. For example, a trader can work effectively with such an important factor as time.
Example No. 2.
The investor opened a bullish trade with a profit from the option of 90%. The price did move in the predicted direction, but the contract expiration time had not yet arrived. Further actions of the trader may be as follows:
- he doesn't do anything. The option generates a return of 90% or turns out to be a complete loss;
- buying a Put contract, the expiration time coincides with the first option. As a result, the investor will either lose 10% or make a good profit - plus 180%.
Thus, hedging allows you to reduce risks existing in the market. If you use this approach regularly, there will definitely be profitable transactions that will compensate the investor for all previous failures. The benefits are obvious.
| Price increased | Price has decreased | The price moved in the corridor | |
| Call - $50, 90% | $95 | 0$ | $95 |
| Put - $50, 90% | 0$ | $95 | $95 |
| Total bet amount | 100$ | 100$ | 100$ |
| Result | -5$ | -5$ | +90 |
The easiest and safest way to trade is in a channel, when quotes, starting from the upper or lower border, change direction. You need to place bets while waiting for the rebound to happen.
conclusions
Hedging is a reliable way to manage money. Before deciding to use it, you must carefully study the conditions of the DC and weigh all their advantages and disadvantages.
It is not always possible to establish optimal work with one broker; then, to insure transactions, accounts are opened with different companies.
The expiration time of two oppositely directed positions must be selected so that they are closed simultaneously. The size of the bets is not clearly regulated. It is allowed to hedge a transaction in a smaller amount if indicators warn of a clear trend in the direction of the forecast.
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