Hedge the news with Binary Options

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Hedge the news with Binary Options

Good Day traders,

In this article I am going to explain you a very simple but effective system from which you can make a sure profit using binary options. I use this strategy sometimes, mainly when we have news realises. Where is the problem with news realises? The market always is makes the big move some seconds after the announcement. You can know what time is the announcement but you can’t know exactly some seconds after it.You can know it about one minute later when the economic sites will post the announcement. So, what I do? Let’s assume that we have news at 11:30 AM. I use two monitors. One for the charts and another one for the orders.I was waiting to close the last candle one minute before the news, at 11:29 AM, and in the next candles, the news candle I am looking for buying or selling climax. If the candle starts to be green this means heavily buying activity some seconds after the news, the market will move up.If the candle starts to be red with selling climax this means heavily selling activity and the market will go down. Sometimes we have a correction exactly after this candle and the market goes to the opposite direction but the most of the time the first candle after the news, the news candle as I call it show us the way. To avoid unpredictable conditions like the condition I said above you can do one simple thing. Hedging the news. For doing this you can use two different financial products in the same asset. Spread Trading or Spot FX and Binary options. I take my main position usually with a Spread Trade and I am hedging this position with a binary option contract. Let’s see an example.

Look at this chart. It’s from GBPUSD currency pair. In the blue rectangle I drew we have the “news candle” (the big bullish candle). Now, let’s assume that your max loss you want for the Spread Trade or Spot FX is about 40$ and this will be your stop loss. You take a trade with 1 Lot or 10$ per pip. When the news candle starts to have buying climax the market shows us the way. You open your buying position. The same time open a binary option contract in the opposite direction, take a 50$ put. So,

Scenario 1: The price moved up about 35 pips and you made 350$ from the Spread Bet but you lost 50$ of the binary option contract. Total profit 300$.

Scenario 2: The first reaction of the market was false and it moved in the opposite direction. Your Spread Bet stopped at 40$ loss (stop Loss order) but you won the binary options (payout 70-80%) can give you about 40$ profit. Your total profit is 0$.

Hedging a Binary Option

Binary options are an interesting way to speculate on the markets. The idea that they pay all or nothing, regardless of how far the price moves, makes it easier to understand, but also more akin to gambling on the outcome, in this case the price at expiration. But what some don’t realise is that you can also use binary options for hedging as well as speculation. In fact, some sharp traders use binary options for hedging profitable forex positions and for extending profitability in the case of small pullbacks. Hedging in this instance means using binary options in such a way that you come up with a way to lose only slightly while being open to higher gains.

Binary options have a strike price and expiration period, which may be as little as a few minutes or hours. If the price is above the strike price at expiration, a binary call option pays out the set amount; a put option would pay nothing. If the actual price is below the strike price at expiration, the binary call option is worthless, but a binary put option would pay out the agreed amount. The price of the option depends on how likely the outcome is, including how far in or out of the money the underlying is trading at present.

Hedging a binary option involves buying both a put and a call on the same financial instrument, with strike prices that allow both to be in the money at the same time. That is, the strike price of the binary call option is lower than the strike price of the binary put option.

Consider what this means. If the actual price is between the two strike prices at expiration, both the put and the call option would be in the money, and you would make a healthy profit over your premium outlaid. This is the best scenario, and all it requires is for the price to be in a range, the size of which is up to you. Admittedly, the larger the range, the more the binary options will have cost you, but that is part of your assessment on making the trade.

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But because you have hedged your trade by taking both sides, with the call and the put, even if the price goes outside the range, all is not lost. Taking a single binary option would mean losing it all if it finished out of the money; but with this method, one of the options will still pay out regardless, cushioning the loss. You will still take a loss, as the premiums will be more than the payout of one single option, but the loss will be much less than it could have been.

In summary, to hedge with binary options, you buy a binary call option and a binary put option, with strike prices that overlap, so that at least one of them will pay out. You can win a greater amount than by taking just one option, and if you lose money you will lose far less than the straight loss that you would suffer with just one option. It’s a useful tool to add to your trading arsenal.

Example of a Binary Hedge

Here’s a real-life example of a binary option hedge as highlighted on MarketsPulse.com. The scenario takes the case of a forex binary option on the price of the Euro. In this instance the Euro has been rising and is predicted to keep on rallying at a determined breakout point. At this level you would place a call, expecting the Euro to keep on rising. But what if the price changes direction and falls rapidly? You can place a put option at another point, helping you to minimize risk in the event that the price does indeed retrace.

In the above scenario, you have placed a call for $500 at the option price of 5.1. You have also placed a put for $500 at the option price of 5.3.

The following outcomes could happen -:

  • The Euro price could expire at 5.1 exactly, making your call option at-the-money. You would get $500 as a return of your initial investment. In this case your put option would be in-the-money, and you would receive $850 on your initial investment. Total investment= $1000. Profit= $350. This trade would end up being a net gain. (-500 + 500 + -500 + 850).
  • The Euro price could expire between 5.1 and 5.3, making both your put option and your call option in-the-money. You would receive $850 for both trades. Total investment= $1000. Profit= $700. (-500 + 850 + -500 + 850) This trade would end up being a net gain.
  • The Euro price could expire below 5.1, making your call option out-of-the-money. You would receive $75 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $850 on your initial investment. Total investment= $1000. Profit= – $75. (-500 + 75 + -500 + 850) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
  • The Euro price could expire above 5.3, making your call option at-the-money, and you would receive $850 in return of your initial investment. In this case your put option would be out-of-the-money, and you would receive $75 in return of your initial investment. Total investment- $1000. Profit= -$75. (-500 + 850 + -500 + 75) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
  • The Euro price could expire at 5.3 exactly, making your put option at-the-money. You would receive $500 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $850 on your initial investment. Total investment= $1000. Profit= $350. (-500 + 850 + -500 + 500) This trade would end up being a net gain.

In each case, you stand a possibility of gaining a bigger profit by hedging, or placing two bets in opposite directions, as opposed to an all-or-nothing outcomes of one binary bet. In the instances in which you stand you lose money, you lose far less than the possibility you have to gain a greater profit than loss in other circumstances.

Hedging Your Binary Options Trades

When it comes to a Binary Options trading making many more profitable trades it is often through hedging that this is achieved. Hedging is simply the name given to when a trader places more than one single trade on any company’s share value, commodity or any type of trading opportunity.

Initially a trader will place a trade on their chosen opportunity, however if that trade as it is live is looking more and more likely that is will not be a winning one then that trader will place additional trades on the same option but in the opposite way as the original.

So for example is a trader has a live trade on let’s say the value of oil dropping, however as that trade is live the price of oil is rising he or she will then place another trade whilst that one is live on the price of oil rising over a set time period.

However, one of the ways they will often be funding those hedged trades is by using one of the bonuses that they may have claimed by signing up as a new trader at a Binary Options Broker. By using this type of hedging strategy they are going to end one of their trades in profit having covered both sides of the trade.

In fact as many Brokers occasionally offer their traders a range of no risk trading opportunities should you get one offer at two different Brokers then you can place a trade on both sides of that trade with the no risk trade and one of them will be in profits at expiry time and the one that isn’t will see you getting your invested funds on that trade back from the Broker by virtue of the no risk trade!

Frequently Asked Questions

  1. How Long Will It Take to Learn How To Hedge?

Do not think that you are going to be able to master the very fine art of hedging Binary Options trades instantly, as it can take a lot of practise and determination in regards to tracking down the very best and ultimate hedging opportunities.

You are going to be best off placing a range of initial trades via a demo trading account whilst you are learning the art of hedging, as you will be doing so in a no risk trading environment, so any initial mistakes you do make will not be costing you anything.
Can I Hedge Any Type of Trade?

It doesn’t matter what type of Binary Option trade you are looking to hedge you are going to find plenty of hedging opportunities are available on any type of trade.

Just remember that the way in which you are going to often get the best value is by you making sure that the price you are being quote and you take for placing a winning trade should be the very best ones on offer, so do shop around to get the best prices possible!
Are Commodities Suitable for Hedging?

With there being so many different commodities that you can base your Binary Options trades around you may be under the impression those will be the best and most ideals ones to use for when you start hedging your trades, but you may find them perfect for your very first initial hedging trades.

However, never restrict the range or type of trades you can place by sticking to just Commodities as you will find you can hedge any type of Binary Options trading opportunity and as such you are as likely to have just as much success for example when you hedge company share values and other stocks and shares as you will do by hedging Commodities.
Can US Traders Hedge Trades Easily?

One question that you may be looking for the answer to if you are one of our US based website visitors is whether you are going to find enough Binary Options Brokers to allow you to have plenty of platforms available to hedge your trades.

Well fortunately we have quite a number of fully licensed and approved US facing and US trader friendly Binary Options Brokers listed on our website and as such you should have no problems finding several of them at which you can open and account and then start to hedge your trades quickly and easily.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

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  • Binomo
    Binomo

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