Hedging Strategy

The hedging strategy: Hedging with Binary Options

In addition to the volatility and trend-following strategy a third trading strategy still is used relatively frequently. It is known as the hedging strategy or sometimes is only called "hedging". For Hedging it is all about to secure a medium- or long-term trade position against any loss what can be done well through the Binary Options. The hedging strategy is not primarily used to achieve profits in Binary Options, but the Binary Options are used as part of the hedge to hedge other trading positions e.g. an investment in Forex Trading.

How does the hedging strategy work?

Binary Options are well suited to hedge other positions because they are considered extremely flexible. This applies e.g. the period of protection depending on the broker because there are Binary Options with a term of a few minutes up to one year. Therefore the hedging strategy is also relatively popular for many traders. How the hedging strategy works can be illustrated by an example. Suppose you have some time ago traded currencies e.g. bought the dollar against the euro. So you now have a dollar holdings position and hope that the dollar will recover against the euro. Of course it can arrive at the opposite so you may want to secure the position against losses. This is possible e.g. the fact that you buy a Binary put option with the underlying US dollar. The dollar would now lose to some extent against the euro in value so you would suffer a loss with your dollar holdings position. You can "balance" that with the Binary Option because here you make a profit if the dollar falls in value.

The conservative and aggressive hedging strategy

Hedging is available in different variants so that is distinguished between a conservative and an aggressive hedging strategy. With the conservative hedging the simple Binary Options are almost always used: call or put Options. The speculator wants to hedge possible losses. But the backup of already achieved but unrecognized gains is possible, too. Aggressive hedging traders use often the riskier One Touch Options even in the high-yield segment. In this form of hedging strategy the trader usually has not only the aim of protecting an inventory position against losses and he would like to achieve a high income in addition to the loss protection. The aggressive hedging is significantly riskier than the conservative hedging whereby a high-risk hedge for many traders is anyway a contradiction in terms.