Dear readers, good afternoon! Today I, Anna Alexandrovna, want to dwell on what the hedging strategy gives us, traders. Despite the benefits of trading binary options they have a drawback - a negative expectation. During the loss we lose more than we earn if we succeed. Many market participants have a question: is it possible to minimize risks and how to significantly increase the winnings. This is really possible thanks to a strategy such as hedging transactions.
Desired percentage of successful transactions
When a trader trades on financial markets, he always takes risks. Except for some financial situations, such a business is a kind of game with negative expectation. When a participant enters into transactions on the exchange, the probability of losing money exceeds the chance of earning money. One of the reasons is the commission, which the trader pays for when buying the contract. Thus, even at the opening of the position, we are in some loss. This rule also applies to the BW market.
Suppose, the established percentage of payments is 80%. The percentage of successful contracts should be 100% / (100% + 80%) = 56%. So that we do not go into negative, more than half of the transactions must be successful. And if you want to earn more, you can make mistakes only in three out of ten cases. And this despite the fact that the percentage of payments will be high enough!
To reduce costs, traders apply different strategies to minimize them. When working with a market such as binary options, hedging is the best way to hedge against losses. Of course, as a result of using this strategy, profits may decrease, because it is directly proportional to the degree of risk. But in some cases, hedging helps to double the revenue from the transaction.
Possible hedging options for BW
It will be more correct to call a hedge not strategy of trade, but an effective method of money management. Decision to open a position is necessary with the help of a specific strategy that allows you to conclude profitable contracts in more than 60% of cases.
Now let's consider several options that are possible when hedging the BO:
• Out-Of-The-Money, abbreviated OTM.
This is what the option is called, which brings a certain loss on immediate execution. In this case, when buying a Call option, the current price should be less than the cost of execution. If you buy Put-option, everything will be exactly the opposite: the strike-price should be less than the actual value. When the difference between the strike price and the current price is significant, it can be said that the option at this time is deeply OTM, or in a big loss.
Although many newcomers like to use this strategy at unprofitable positions, the best way out in such a situation is to accept losses and fix them. Let's look at a concrete example, why this is better.
So, we buy an option that costs 10 dollars. But after a while the situation on the market became different, and the price turned back. The standard solution here is to buy at the top of a new Call Option with a cost of 10 dollars. But in the case of BW, this option does not work. If we fail on both contracts, we suffer double losses. Instead of cutting costs, they only increase.
• At-The-Money, or ATM.
This is an option, the immediate result of which will be zero. This can happen when the exercise price and the current value of the instrument are equal. Since positions at the same price are opened infrequently, this situation is atypical for financial markets.
Now an example: we bought the put option, but the price unfolds and breaks through the resistance point. Since the breakdown has already occurred, it is advisable to wait until the level of support is confirmed.
If the cost concerns the line on the other hand, you can purchase a Call option of the same expiration period and the same size. When the Call Option is at this level, a break-even zone is created. The result of such transactions will be zero, but costs must be taken into account.
• In-The-Money, abbreviated ITM.
ITM is an option, the result of which, if executed immediately, will be positive. For Call options, this is the situation where the current price of the asset will be higher than the call strike. If you consider the Put option, the strike price will be greater than the current value. With a significant gap, it is customary to say that BT is deep in ITM, or deep in money.
To use the strategy, you need to determine the maximum trading period and purchase the Put option. Then the minimum of the trading period is searched for and the Call option is purchased.
The main and rather difficult task for a trader is to determine the minimum and maximum. To ensure that everything went well, the price should move symmetrically. In this case, the market participant will remain in a timely manner to open positions from the corridor boundaries. With a low volatility of the asset, the result will be fairly predictable.
Another small example. We receive a signal to enter and acquire the Call option. The cost is moving in our direction. When it reaches the other side of the channel, we'll buy a Put option with the same expiration time and the same size.
This is an excellent solution, because this option is a win-win. Regardless of the direction of the price movement, both contracts will be successful. The schedule will consist of two zones, one of which is breakeven, and the second will bring a double profit. As a result, we get two winning trades.
Rules for working with a hedging strategy
Thus, when using a hedge, a trader passes through several stages:
1. Receiving a signal to the input that the trading strategy sends.
2. Choosing the right amount, expiration date and the acquisition of Call or Put options.
3. The price moves in the right direction, while there is time before expiration. From the trading strategy comes a signal, the opposite of the former. This can happen for various reasons: the current trend is weakening, there is a significant level of support and resistance. There are other factors that affect the signals of the system.
4. Then we acquire a reverse option, but the expiration time must match the original one. Thus, in order for the strategy to work, our options must be executed simultaneously.
Now it remains only to wait until the option is executed.
Practical examples of trading with hedging
For the following example, take the 4-hour chart of EURGBR. On the chart, we can see the price that moves in the side corridor, as well as the levels of support and resistance. When the price comes in contact with the resistance level, the Put option is acquired. If the price rushes down and touches the opposite border of the channel, we will buy a Call option of the same size. When the expiration period of the two deals comes to an end, the price will be within the specified range, and our profit doubles.
The following example can be considered on a five-minute chart. Price breaks the support line, and we get a Put option, expiration time of which is 4 hours. But after a certain time, the price gets support and starts moving back.
Then it fights for the first time from the resistance level, and in the second it breaks through it. We live until it touches the key level, and acquire a Call Option, the expiration time of which corresponds to the first contract. As a result, from the first transaction we receive a loss, and the second one ends with a profit.
Hedging gives market participants the opportunity to reduce the risk of trading BO to a minimum. In this he has advantages over Forex. This strategy gives the trader a lot of opportunities, among them - obtaining a double income. The strategy can be applied in work with both long-term and short-term options.
In conclusion, I want to give you, my friends, a little advice. You need to make sure that in the chosen one brokerage you can adjust the expiration time as flexibly as possible. This moment is considered one of the key in this strategy.
In addition, to trade better with reliable strategies, whose winrate is high - more than 60%. If you take into account these recommendations, hedging will be your assistant in reducing costs and increasing profits.