In general, hedging is the reduction of the risk of an existing position by traders either taking an opposite position - for example in futures - or trading products that already have such a risk buffer have installed. This includes, for example, a classic option.
It should be noted that hedging is always associated with additional costs, such as insurance. This means that the risk buffer that a trader installs for a current position also costs him part of the return. In special circumstances, however, it is also possible to carry out hedging with binary options. Let's take a look at two examples:
Hedging with options and futures
Products such as options and futures were created because of pre-tailoreding. Farmers in particular have used futures to hedge against falling prices. We don't want to go into detail about the product structure, we just want to show how hedging works with it. No risk buffer is built into futures. If the trader wants to hedge a position with futures, he must take a counter position with it.
Let's assume that there are 100 Apple shares in our portfolio. We could hedge the portfolio by selling futures that have the same monetary value against further losses if the share price falls sharply. This would make us profitable with futures, while we would lose Apple stock.
With options, hedging basically works by traders opening counter positions, so buying put options - only that options add an extra Show risk buffers. If the share price remains stable, you let it expire, only pay the lower price for it and subtract it from the return on the portfolio, while futures would inevitably have lost the entire stake.
Hedging with binary options
The following strategy is not used as in the example above for the hedging of portfolio holdings; rather, traders hedge a different position in binary options. So it is about reducing the existing risk in the current position. It must also be clear that this will reduce the return. That is the price for the additional hedge.
As we have also learned above, it is necessary to open two opposing positions. A binary option has a target price. This is the price that the underlying must outperform for a call option in order for the call option to pay out a profit. In the case of a put option, the target price must be undercut so that it pays off.
If you have bought a call and a put option with the same target price at the same time, the positions should theoretically balance each other out. But we don't want that; we want a reduced risk. To do this, we would have to build opposing positions, but with different target prices. Why is that important?
Suppose we bought a call option on Apple shares with a target price of $ 100. When the term expires, we get a return of 75 percent if the price is over $ 100. On the other hand, we lose the stake if the option is below $ 100. We can hedge this case by buying a put option when the price of the shares has already fallen below $ 100. However, we have to be pretty quick: if it stays below, we lose our investment for the call option, but this loss is reduced by the profit of the put option.
That sounds theoretical? Then try it out practically. It is important to note that you continue to pursue your strategy as before and only open a hedging position when the market technology shows a real slump in the price. The target price must therefore represent a relevant zone.
Double profit with hedging strategies - iq option strategy
Conclusion - with a bit of skill, hedging with binary options is also possible
Admittedly, hedging with binary options is somewhat complex. With a little experience, however, you can build up good positions here, too, so that you end up with a lower but secure return. With the broker BDSwiss, traders can implement such strategies.