The Hedging Strategy

Posted by OliverPearson 0

Hedging Strategy

Perhaps no surprise, quite a few investors succeed in binary options trading because they can reduce risks and increase chances for success. Nobody is impervious to losing trades but all can reduce risks.

All hedging strategies are based on simultaneous buying of two options on an underlying asset with the condition of a price rise and fall.

There exist different methods of hedging, and today I will tell you about one of them. Generally, the hedging strategy lies in using a volatile underlying asset moving sideways or in a flat channel. Its chart looks the following way:

Hedging Strategy 2
 

The chart shows McDonalds stocks available to buy from AnyOption. This is not a short-term strategy because it takes time for the price of an underlying asset to move down from the peak to the bottom. To use the strategy, you need to find the highest and lowest level of a price.

Based on statistics and a price channel, you have to buy an option with the condition of a price rise when the price is at its lowest level, and another option with the condition of a price fall when the price is at its highest level. You can set expiration, say, to the end of a day.  

This is how it looks on the chart:

Hedging Strategy 3
 

As you see, I bought two options, that is, a CALL and a PUT option with the condition of a price rise and fall.  The END point means option expiration. Both options have returned a yield.

And now let’s count profits and risks.

My investment amounted to $100

I invested $50 in each option.

I made $70

My options expired inside the channel. I made a 70 percent profit on each that equaled to $35.  The total profit I’ve made is $70.

$7.5 Risk

Even if the price had left the channel, I would have made $35 on each option (+investment $50) and returned 15 percent or $7.5 on a losing trade that would have totaled to $92.5.

Obviously, risk is nine times lower than a profit. Even if only one out of 10 trades is successful, you won’t lose anything.

The key point of success is a right choice of an underlying asset and chart analysis. For instance, Currency pairs like EUR/USD, GPB/JPY often move inside a channel. Also, buying an option, you need to have in mind volatility of an underlying asset during a certain period. If volatility continues for several days, then I advise you to invest till the end of a week.

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