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Binary Option Hedging Strategy
The word binary is used for the method of representing numeric values using the digits 0 and 1. The reason why binary options was the name derived for this kind of options trading is that there can only be two possible outcomes in this trading: either in the money or out of the money. The former means that you will gain profit from the investment in the stocks being traded. Being out of the money means that you will not get the payoff.
Finishing in the money means that after the trading time expired (expiry dates come in 1 hour, 24-hour, 1 month options), the market you are betting on must have a have a higher or lower price, depending on whether you chose call or put (with call meaning that you bet the performance of the stocks will go up while put is the other way around).
The good thing about trading binaries online is that you do not have to own the asset to be able to participate in the trading. All you need to do is to choose one of the binary options brokers and bet on whether a particular Asset will go up or down. You do not need to look only on promising stocks because you can bet ‘put’ on losing stocks.
Traders earn money through taking risks in the stock, currencies and commodities markets. That is why it is very important for them to determine and the costs and consider if it is still worth the gain. But with binary options, people in the trading market finally have the best of both worlds: they have the predetermined costs and gain before they start trading a stock and the profit that they get from it is comparable to riskier stocks trading. Nevertheless, this risk is the reason why binary option hedging strategy is made.
In a nutshell, hedging means being able to lock-in the profits earned from the stocks being traded. In the fast-paced environment of stocks trading, no trader can be too sure about finishing in the money even if 59 minutes already passed in their hourly trading sessions. And because of the volatility of the trade, binary options hedging strategies with put and call options are employed in order to give traders the chance to get their gains at the current time, therefore reducing risks on the part of the trader.
Say you are a trader 15 minutes away from expiry time. With your current stocks in the money, the strike price of your $20-per-share stocks is already valued at $22. At this point in time, you may employ hedging strategies in order to lock the current profits. The trader has the option of either fully or partially hedging his stocks: full hedging pertaining to getting all the profit at current market value while partial hedging means selling just a portion of the stocks and still trading the remaining amount just in case the stocks continue to be in-the-money.
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