Hedging Binary Options: Can You Hedge Against Losses?

Binary Options are very simple and easy to understand financial instruments. However, as everywhere else in trading, it takes a little strategy to have a good long-term outlook for Binary Options to make profits. Otherwise, one more or fewer gambles, which rarely leads to success.

Having already introduced a hedging strategy with binary options, which can be useful for Forex positions, for example, we now present a strategy with which you can even increase existing book profits in binary options and at the same time protect yourself against losses.

The so-called “Pairs Hedge” or “Pairing” is a simple but effective strategy to hedge against losses in a Binary Option and at the same time increase the profit potential within certain limits. This is done by simply buying another Binary Option so that you practically form a “pair”.

How do you secure potential Binary Options gains during their term?

Let’s assume you have bought a call option on the DAX at 6,800 points with a term until the end of the month. The DAX rises to 7,100 points (near its all-time high) and the option is currently well in the money (price above the strike price of 6,800 points). Depending on the chosen broker, the option would yield between 80 and 95 percent return at maturity at the end of the month if the DAX is still trading above 6,800 points. One has thus currently achieved a nice book profit. However, if the binary option expires out of the money at the end of the month (when the DAX is still below 6,800 points), you have not only lost your Binary Options profit but also suffered a loss. How can this be prevented? – By a simple measure, which is described below.

Our binary options strategy:

Example: Buy a second Binary Option on falling prices

By buying a put option (also expiring at the end of the month) on falling prices at the current price of the underlying instrument (DAX) of approx. 7,100 points, you achieve the following:

  • A price window between 6,800 and 7,100 points is created in which both options are in the money – you make twice the profit!
  • If the DAX falls below 6,800 points, the gain in the put option largely cushions the loss in the original call option
  • If the DAX continues to rise and exceeds 7,100 points at the end of the month, losses are incurred in the put option, but these are offset by gains in the call option

Hedging binary options – now in only 5 steps to your first trade

We have explained in advance how you can use hedging when trading with binary options. But what should you pay particular attention to when trading financial instruments? How does binary options trading work and what is really important? In the following, we have summarized the most important facts about trading with binary options in a compact and clear way for you:

Conclusion on pairing: Binary Options Hedge with profit increase potential

It is clear that our Binary Options strategy is a good choice if, for example, you expect a price correction after a sharp rise in the share price towards an important resistance zone (e.g. the all-time high in the DAX). By additionally buying a put option, you hedge against losses, regardless of whether prices rise or fall. Within the price window between the strike price of the call option (6,800 in the example) and that of the put option (7,100 in the example), you double your Binary Options profit. To do this, the price of the underlying instrument (DAX) should correct slightly, but not fall below the strike price of the call option. The only disadvantage of this strategy is that if the price continues to rise or falls sharply below the strike price of the call option, no profit is made. On the other hand, one does not suffer a large loss.

By combining a call and a put option (pairing) you can effectively manage your Binary Options risk and thus take an important step towards long-term profitability as a trader.

Check out my other posts about Binary Options:

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