Hedging strategies can be described as the strategies which are created to decrease the risk of investment by using put options, call options, future contracts or short selling methods.
The basic aim of using these strategies is to decrease the risk and possible volatility of an investment or a portfolio by reducing the risk of loss. Hedging provides the advantage of locking in the current profits.
Hedging strategies are used also in the binary option trading with the purpose of minimizing the risk of loss. It is very advantegous while trading Forex.
Though they sound a bit difficult to understand in practice hedging strategies are much simplier. The actual result of using this strategy implies that the risk from the stop-loss zone is moved to the area above the break out point. The prices at the breakout point are more likely to increase and there is lesser risk of unsuccess. Hedging a binary trade with a call and put option dramatically decreases the risk of the fast paced, high return contracts of binary trade. The hedging strategy is explained with the example below:
An investor takes a contract of $ 200 with a strike price of $1 0 per share. Depending on the expiration terms, the investor is early in the trade, that is, he has still some time left for the expiry time and the trade is “in the money“. The share price may have increased to $10. 75 or $11 per share. At this stage, the trader might have suspicions about whether to hold the position till expiration or lock in the gains. Sudden changes could occur at expiry time resulting in a fall in share prices or there could be another increase of appreciation of prices. Thus the best way here to lock in at least some of the returns is by making a partial or full hedge. In case the trade is fully hedged the risk of loss is minimized whereas in case it is partially hedged, the trade is still left open partially and the trader has the chance to still make profits if his intuitions prove to be right.
For these reasons the binary option hedging strategy with call and put options is a good method of minimizing the risks in a fast paced market. Since the binary trading has expiry times that are hourly or daily, these hedging strategies are easier to understand comparing to other types of strategies which are applied in other options tradings.