Binary options hedging strategies are diverse. Whether you have long or short stock positions, risk is always there; traders know it needs to be mitigated by any means possible – their livelihoods depend on it. One of the most effective ways is binary options hedging. Given the popularity of binary options trading strategies among traders, it was only a matter of time before somebody thought up an ingenious way of using binary options to hedge risk.
Plain vs binary options – Binary Options Hedging Strategies
The difference between ordinary and binary options is the payout (binary options offer fixed amounts while plain options’ payout is variable). Their fixed predictable payout makes binary options a perfect hedging instrument.
In terms of basic elements, binary options do not differ from their ordinary counterparts: they too have the fixed (strike) price, the index or stock they relate to and the expiration date. However, the payout is either fixed (100 dollars per option) or nonexistent (i.e. 0 dollars, because you lost). In other words, the option holder and the option writer (the one who bought an option and the one who sold it, respectively) arrange a set of conditions – the most important being the market price on a specific date – and if the conditions are met, the option writer pays the holder 100 dollars. If not, the writer gets to keep the premium he got from the holder when the purchase took place. The amount of premium varies based on the likelihood of payout conditions being met: the more likely the outcome, the higher the premium – at the expense of the profit. Binary call options are cashed if the strike price is below the underlying price and binary put options if the opposite is true.
If you own long positions on a stock or index or whatever, you need to make sure that stock price doesn’t fall below a certain price – or you lose money. Now, you can’t stop your stocks from falling, but you can secure your position with relative ease: by betting against yourself with enough binary put options, their 100 dollar payout can make up for any losses you might incur – just make sure the payout covers every expense for both trades. The higher the underlying price, the more you make on your long positions – and if the underlying price is insufficient, the binary options payout will cover the losses, all that for just a small extra payment.
The same goes for short positions, except the underlying price in that case should be lower than the strike price, and you need binary call options instead. Otherwise, the principle is the same: binary option payout will keep you covered if the underlying price gets too high – if not, your short positions will make up for the premium you lost on binary options.
Nowadays, futures and regular options are losing to binary options when it comes to risk hedging. Binary options hedging strategies are simply easier and more reliable. It’s your dime, so choose wisely.