Methods hedging forex risk
Binary Options Trading Hedging Methods
In this article I am going to discuss and explain you some hedging methods that you can try with Binary Options contracts.First of all, I want to explain what is exactly hedging. Hedging is a way to reduce the risk of your trades. It can give an “insurance” to a trader and protect him from a negative movement of the market against him.Of course, it can’t stop the negative movement but a clever hedging can reduce the impact of the negative movement for the trader or it can even annihilate the impact of the negative movement for the trader.Hedging methods are applied every day to the market by the traders to give a “sure profit”. This profit is usually not very big but it’s steady with low risk.
A very popular hedging method in binary options trading is “the straddle”. This strategy is not easy because it’s difficult to find the righ setups. It’s a strategy about two contracts with different strike price to the same asset. Let’s see a screen shot.
This binary option chart is from GBPUSD currency pair. The general idea of this strategy is to create bounds for the same asset with two contracts. To create an ideal straddle you must find the higher level of a trading period and take a call and the lowest level of a trading period and take a put.That’s why this strategy is not easy, because is a difficult to predict the highest and the lowest level of a trading period. A good trading period for straddle is when the price is moving inside a symmetric channel like this. There is not much volatility to create unpredictable situations. So, look at the chart. We have a previous resistance and a previous support. When the price hit the resistance which the highest level for now we can take a put with 15 minutes expiry for example. After that the price is moving down and hit the previous support which is the lowest level for now. In this level we can take a call with the same expiry, 15 minutes.
Now let’s see the possible scenarios.
1 st scenario: The put contract expires after the reversal in the support and it’s in the money.Five minutes ago we took a put in the support which expires in the money,too. So, in the first scenario we have 2 ITM trades with a high reward.
2 nd scenario: In the second scenario our first put trade will be in the money but let’s assume that the support will not stop the price for our call like the next time that the price test the support in the chart. So, we have an ITM put and an OTM call. This means a very small loss for us.
So, if a trader will create a good straddle the possible scenarios are a high reward or a very small loss.
Some more binary options hedging strategies
These strategies are mainly for binary options trading in an exchange and are about hedging the same or different assets.
GBPUSD and USDCHF are two currency pairs which usually moving opposite to one another. Let’s see two screen shots.
This is from GBPUSD currency pair. You can see that at 12:25 the GBPUSD is moving up and about 50 minutes is still moving up.
Now, this USDCHF currency pair chart and you can see that the same time(12:25) the price is moving down and about 50 minutes is still moving down.
So, there are opportunities to trade this. I usually open 2 trades (one in GBPUSD and another one in USDCHF) in Spread Betting or Spot Forex with the same direction. You will win one of them for sure.For being profitable with this you should find the right time in which these two currency pairs give you a profit.For example in this chart we can open two sell orders.Even in first 10 minutes we will have profit because the downtrend in USDCHF is stronger than the uptrend in the beginning.
This is a trade I took which gave a 36$ sure profit. For doing this in Spot or in Spread Bets you must have a good margin in your account.
These two pairs EURUSD and GBPUSD are moving in the same direction. You can hedge them in a binary options exchange.Let’s see an example.For the example we will use 2 five minutes contacts in these 2 currency pairs.The contracts are opening for example at 10:00 and the expiry is at 10:05.We are buiyng a call contract for the one of them and a put contract for the other.The premioum for the both of them are 100$ because we are buying at the beginning before the price move.(50$ for EURUSD and 50$ for GBPUSD).After some minutes the market has moved to one direction up or down. One of our contracts will ITM and the other OTM. Now, for example at 10:03 we are closing the OTM contract with a small loss like 20$ the most of the time and there are 2 minutes left for the winning contact to expire. The contract will expire and we will earn 100-50=50$
50-20(our loss)=30$ sure profit if will not happen an unpredictable movement in the market like a big candle of 3 or 4 pips.