BO209 Lesson – Learn Hedging Strategies for Binary Options Trading Video & Transcript
Welcome to binary options 209 hedging strategies, minimizing losses, and reducing risk exposure. This is the last video in our binary options to 200 series brought to you by binaryoptions.education.
What’s is hedging? Hedging is a trading concept used to minimize losses or the amount lost when trading financial markets. To hedge in binary options is to open a position opposite to our current position. So having both a call a and put option open on the same financial instrument at the same time. If you haven’t already done, please watch bond binary 104 104, break even ratio and binary options 110, money management.
I don’t cover hedging in those videos, but if you combine what is taught in those two videos a and what will be taught in this video, you have a strong foundation of minimizing your losses reducing your risk exposure .
So in this video I’m going to give you two hedging strategies. They’re both used when price ranges and both strategies bother very much rely on support and resistance. The reason why I’m not going to give any hedging strategies for trend in markets is when price trends we know it moves in one particular direction, hopefully very strongly.
And there’s not much need to hedge a trend. If price is moving very strongly up on the upside we want to be opening as many core positions as we can to profit from that large movement.
Whereas when price ranges, we have this up and downwards motion and we have the potential to open a number of puts and a number of calls and profit as price moves up and down but in a general sideways direction.
So this is the first hedging strategy that I’m going to give you. First, you need to identify a range being price moving in between a support and a resistance. And quite simply, we want to open calls on supports and puts on resistance. Now the reason we want to do that is we will hedge opposition so if we placed a call on the support, price then moves on the upside, reaches our resistance area, we could then sell a put.
And the reason we would do that is because with when both of these options expire, we can profit from both the call and put. But as long as the support and resistance is held, 99% of the time price is going to close in between the support and resistance.
So if our binary options expired here, prices lower than when we opened our put and prices higher from when we opened our call. Since scenario one, we have the potential of gaining double profits and also there’s a guaranteed win. One of these positions is going to win.
Now let’s look at scenario two using the same strategy. Prices moved up to our resistance. We placed a puts. Price comes down to our support. We buy a call, and then this support is broken. We know support and resistance does break. It doesn’t always hold. So this support is broken here.
And here is our expiry, this one line here. So our call would have made a loss, but our put would have made a profit. So once again, we have a guaranteed a win no matter what happens. We’re guaranteed to win at least one of these positions. And our loss is dramatically reduced. The reason being is if we had just placed a call to the support line we would have made a loss.
So we placed a $10 call price closed lower on expiry, and we made a $10 loss. Whereas if we hedged this position and had a $10 put also p we would have would have made a 10 the loss on the call, but we would have made a gain on the put. And say the payouts 17 percent. We would have lost $10 on the call but gained to $7 on the put.
So we would have on you made a lost of $3.00. Compare that to $10.
And hopefully, you’ll start to see the benefits of hedging positions. Once again, if we go back to scenario one, if we’d had only placed a put, we would have made a profit when the option expired, but we would have made double the profit if we hedged the position.
Let’s look at another hedging strategy. And this time let’s use the example that supports or assistance is broken. In this hedging strategy we’ve placed a put on resistance prices, price has that broken that resistance, and we know more often than not that when resistance is broken it can become supports, and when supports is broken it can become resistance. The whole ceiling become floors, and floors become ceiling concept. We also know that when a supports and resistance broken price of comes back to that supports and resistance to test and then bounces off.
And that’s what we have in this illustration. Prices broken the resistance. It’d come back, tested the now support and then go on the upside. So if we had placed a put and it would on this resistance, and it wasn’t already hedged, when price breaks this resistance and comes back down to this now support in a similar in a similar area to where we placed our puts, we can place a call option and hedge our puts.
When these options expire, we have a guaranteed win. Our call is a win, and our put is a loss. If we did not hedge our puts and price broke on the upside, we would have simply just made a loss. Once again, if we had a ten dollar call and a ten dollar and a ten dollar put without hedging we lose $10. With hedging, we only lose $3.
So let’s look at these examples I’ve given on real-life price charts. This is the euro / US dollar it’s a five-minute chart. If you’re interested in hedging ranging markets, or if you’re not interested in hedging but are interested in trading ranging markets, then overnight sessions of European and US currencies are great for ranges.
So this is an overnight session in London or the Sydney Tokyo session and price is ranging on a five-minute chart. So we have a number of opportunities to hedge positions. Call, put, call, put, call, put, call, put, and then other call here.
And you’ll see it’s not until the start of the London session, which is roundabout here, that price actually comes out to this range. So it’s very likely we could’ve made double profits on all of these call and puts using the hedging strategy.
Let’s look at a longer-term time frame. Let’s go to a daily chart for those of you who may be interested in trading binary options on longer-term time frame So let’s do the pound against the US dollar and look at recent price action. We’ll see them in a bit. Here’s own resistance. Here’s our support. Price comes up to this resistance.
We could sell a put option. Especially because we have a bearish Engulfing candle there. Price breaks out of that resistance and then comes back to test the resistance now turned support. So There’s our signal to open a call position and as price moves on the upside and our binary options expire, we have reduced our risk. As we have one guaranteed when which will reduce our loss rather than placing a put option here and simply making the loss without having a win.
Reducing exposure. I have two tips or two bits of advice for reducing exposure. First of all, splitting positions and then portfolio diversity. So let’s look at splitting positions and let’s go back to one of the illustrations I used for a hedging strategy. When talking about hedging strategies and using this illustration, I used $10 as an example of a call and a put. But we can reduce our losses and reduce market expectation if we split our positions.
So if we’re looking to place $10 per call and per put, It could be that once price reaches this support area we place a $5 call. And then we have a confirmation signal that the support is being held, say a bullish Engulfing candle or bullish Pin Bar, or price starts to move on the upside. We could then place the remainder of our position, the other $5 call, and that’s our $10 position opened.
On a put, when price reaches its resistance area we could place a $5 put instead of the full $10, once we have some sort of bearish confirmation that the resistance could hold. We would then place the remainder of the position. A Another $5 put.
Now the reason for doing this is the more signals we have that a support and resistance is going to hold, the more likely we will profit. If we placed a $5 call on a support and it didn’t hold, we’ve only $5 dollars, not $10. Whereas if we place a $5 call, waited for the confirmation, and placed the $5 call, we still make the same amount of profits as the 10 position, but our exposure and loss is minimized until that confirmation signal was given.
My other tip for reducing exposure is to have portfolio diversity. So to trade a range financial markets. We have focused a lot on currency pairs, or Forex, in these videos. in a good portfolio you could trade the following currency pairs the euro-Japanese yen, Australian dollar-New Zealand dollar, pound-against the US dollar, and US dollar-Canadian dollar.
The reason why reason why that may be a good trading portfolio is that it has exposure to a number of currency pairs, not just a single currency pair. A portfolio I wouldn’t suggest, would be something like the Australian dollars-US dollars, euros-US dollar, pound-US dollar, the reason being you a large exposure to the US dollar. And all of these currency pairs have strong correlation, so if one moves down it’s likely the others could also move down. If one moves up, it’s likely the others could also move up.
Whereas the first example there is very little correlation between these currency pairs. If you’re interested in that trading other financial instruments apart from Forex, such as indices and commodities, a good portfolio could be something like this– US dollars-Swiss franc. An indices-UK 100 and then a commodity, oil. A
A portfolio I wouldn’t suggest would be gold, silver, and copper the reason being once again, there’s strong correlation between these markets. They’re all precious metals and we want to reduce our exposure particularly to one currency, one category of commodity, etc.
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