Many investors wonder whether it would not make sense from time to time to add other products to their long-term portfolio. Diversification is the key word. As already clarified several times, binary options are predominantly a speculation product and in the recent past have only been of interest to traders. This was partly due to the fact that the products were very new to the market and, despite their simple structure, mostly die-hard traders dared to trade.
Under certain circumstances, however, binary options can also be used as a portfolio addition. But what are they?
What is the purpose of binary options in the long-term portfolio?
Binary options can supplement a long-term portfolio as follows. Through...
- the implementation of cost-effective short to medium-term strategies and
- through short-term hedging of the portfolio.
are binary options comparatively inexpensive
The first point is about supplementing the long-term portfolio with short to medium-term strategies. As a rule, experienced investors are not afraid of contacting new products, since their skills are not limited to the trading product, but rather to the traded value. For them, it is not the product that is the most important criterion, but rather the analysis of the prices.
An experienced investor will usually use several strategies that differ in terms of risk. He can run an aggressive trading account alongside his long-term portfolio. Since long-term portfolios may fluctuate widely, investors have to adjust to returns that can only be realized over a longer time horizon.
However, if an investor wants to generate income at regular intervals, trading binary options would make sense, because implementing these short-term strategies is often associated with transaction costs per trade. Since there are no transaction costs for binary options, trading would be practically free of charge.
Of course, the costs are included in the investment amount, because the broker must also pay fees in the background. However, trading binary options could be cheaper than trading CFDs, for example. Here, however, a comparison should be made in practice, because the difference also lies in the tactics implemented. Someone who carries out several trades a day will probably not get away cheaply even with binary options. However, if a trader only trades a few trades per month, that makes perfect sense.
In addition, the investor has the option of using leverage at low costs. When trading currencies directly, the trader always has to bear overnight costs depending on the interest rate difference between the two countries. In the end, these can add up to a not insignificant amount. With binary options, these costs are already included or do not accrue directly to the trader.
Profit from movements in currency
Hedging portfolios with binary options
Just like in short-term trading, the investor can create his long-term portfolio hedging with binary options. This is the case when major corrections occur. For example, if an investor has several European and US stocks in the portfolio and is in the process of making a correction in the overall market, he can buy put options on the respective indices, i.e. on the DAX or S&P 500, taking into account the right time.
The so-called drawdown, which arises in his portfolio due to the correction, can be bridged to the correction by trading. Of course, the whole thing sounds easier than it is. In practice, it is extremely difficult to hit the right time. It would therefore make sense to build two strategies in advance and train these tactics over a period of time. In the next article, we will show you practically how the whole thing could work.
With regard to the addition of binary options to the long-term portfolio, it can be summarized that the strategy makes sense, when traders are a bit more experienced and want to trade a little more aggressively while investing. In this case, binary options as a product are inexpensive. In addition, the success of experienced traders is not tied to the product, but depends on the asset.
Second, trading strategies built up in parallel to long-term investing can be seen as portfolio hedges, as they can be used in all market phases, If one now assumes that the investor profits in his long-term portfolio in bull market phases and in his trading account in bull market phases, a higher total return can be achieved over time.
With the broker BDSwiss traders can implement such plans. The experienced team of the financial services provider should be of assistance in this regard. The broker can look back on a long history in online brokerage.