Hedging with Binaries
Binary options make for an excellent tool if you are trying to hedge a position. Assume that you’ve bought 50 shares of Apple at $100 each for a total investment of $5,000. If the stock drops $10 over the course of a week, you have lost $500–or 10 percent of your initial investment in the company. That’s a big drop, although it is certainly something that you can recover from. And many traders would, at this point, force themselves to make a decision: should I sell off my shares and eat the loss? Or, should I wait it out because I know that the price will rebound and my loss will disappear?
First, you have to look at the short term cost of that cash. You’re $5,000 has become $4,500. If you think that you will gain back this money quickly by leaving it in the market, that’s fine. But if you think you can gain back the money even more quickly by taking the money out, that is now the right choice. Traders need to focus on the short term first since these are not long term investments.
The alternative approach acknowledges this. It looks at the short term, finds a solution, and attempts to reconcile the long term, as well. So, you’ve lost your $500, now what? If the price of Apple looks like it is going to keep dropping for a day or two before the rebound begins, using binary options can help a lot. By focusing on short term binaries, you can get around an 80 percent profit on even tiny trades. Let’s say you set a limit of two days that the stock will keep dropping and you trade four hour long binaries for each of those two days at $100 a piece–$800 risked total. Now, let’s say you are right on six of those eight trades. You gain $80 six times, and lose $100 twice. Your total gains are $280. While Apple’s price dropped, you focused on short term binary put options, and cut your losses by more than half. And now that the price is ready to go back up, you’ve allowed yourself to make money without having to sell shares, pay a stock brokerage fee, and the reposition yourself, and pay another fee. You avoided all of this by hedging through an alternate market, and now your original losses are about to disappear.
This is an advanced technique, and the exact timing of it can be difficult to learn at first. But, the fact remains that it is a cheaper and safer way to hedge than within every other market out there. You might have noticed that $800 being risked is more than the original $500 that we had lost, but you also may have noticed that it was never more than $100 at any given moment. This allows you to pace yourself and backoff any time you need to without serious losses or any undue risk that you might not be comfortable with.
This strategy can be applied at any amount since binaries have a low cost of entry. Instead of $100 trades, many brokers would allow $10 trades. And you can do it with any type of asset–it doesn’t have to be just stocks. Binary brokers also offer major indices from around the world, Forex pairs, and many commodities. If it’s popularly traded, the odds are that a binary options broker somewhere probably offers it. You can also tweak the timeframes and frequency if you’d like. Binaries can be traded as quickly as 30 to 60 seconds–although these are a little more difficult to predict with accuracy.