This strategy benefits you mostly when you have two options with a range of expiry, where both options could be in the-money. Then you are able to minimize your risk but also maximize your gain.
This option is popular in forex binary options, in which the value of the currency can change very quickly in either direction. In this scenario, hedging could be a viable option for reducing risk to the trader.
Take the following scenario of a forex binary option based on the price of the Euro. The Euro has been rising and is predicted to continue to rise at a determined breakout point. At this point you would place a call, expecting the Euro to rise. But what if the price changes quickly and falls? You can place a put option at another point, helping you to minimize risk in the event that the price indeed falls.
In the above scenario, you have placed a call for $ 500 at the option price of 5.1. You have also placed a put for $ 500 at the option price of 5.3.
The following outcomes could occur:
* The Euro price could expire at 5.1 exactly, making your call option at-the-money. You would receive $ 500 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= $ 350. This trade would end up being a net gain. (-500 + 500 + -500 + 850) Currency Hedging With Options
* The Euro price could expire between 5.1 and 5.3, making both your put option and your call option in-the-money. You would receive $ 850 for both trades. Total investment= $ 1000. Profit= $ 700. (-500 + 850 + -500 + 850) This trade would end up being a net gain.
* The Euro price could expire below 5.1, making your call option out-of-the-money. You would receive $ 75 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= - $ 75. (-500 + 75 + -500 + 850) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
* The Euro price could expire above 5.3, making your call option at-the-money, and you would receive $ 850 in return of your initial investment. In this case your put option would be out-of-the-money, and you would receive $ 75 in return of your initial investment. Total investment- $ 1000. Profit= -$ 75. (-500 + 850 + -500 + 75) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
* The Euro price could expire at 5.3 exactly, making your put option at-the-money. You would receive $ 500 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= $ 350. (-500 + 850 + -500 + 500) This trade would end up being a net gain.
* In each scenario, you stand a chance of winning a greater profit by hedging, or placing two bets in opposite directions, than the all-or-nothing chances of one binary bet. In the instances in which you stand you lose money, you lose far less than the possibility you have to gain a greater profit than loss in other circumstances.
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This option is popular in forex binary options, in which the value of the currency can change very quickly in either direction. In this scenario, hedging could be a viable option for reducing risk to the trader.
In the above scenario, you have placed a call for $ 500 at the option price of 5.1. You have also placed a put for $ 500 at the option price of 5.3.
The following outcomes could occur:
* The Euro price could expire at 5.1 exactly, making your call option at-the-money. You would receive $ 500 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= $ 350. This trade would end up being a net gain. (-500 + 500 + -500 + 850) Currency Hedging With Options
* The Euro price could expire between 5.1 and 5.3, making both your put option and your call option in-the-money. You would receive $ 850 for both trades. Total investment= $ 1000. Profit= $ 700. (-500 + 850 + -500 + 850) This trade would end up being a net gain.
* The Euro price could expire below 5.1, making your call option out-of-the-money. You would receive $ 75 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= - $ 75. (-500 + 75 + -500 + 850) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
* The Euro price could expire above 5.3, making your call option at-the-money, and you would receive $ 850 in return of your initial investment. In this case your put option would be out-of-the-money, and you would receive $ 75 in return of your initial investment. Total investment- $ 1000. Profit= -$ 75. (-500 + 850 + -500 + 75) This trade would end up being a net loss, but you still lose much less than you stand to gain in other scenarios.
* The Euro price could expire at 5.3 exactly, making your put option at-the-money. You would receive $ 500 in return of your initial investment. In this case your put option would be in-the-money, and you would receive $ 850 on your initial investment. Total investment= $ 1000. Profit= $ 350. (-500 + 850 + -500 + 500) This trade would end up being a net gain.
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Would you like more information on binary options? Interested in starting your own binary options site today? Sign up for a free demo of our platform at bestbinaryoptionbrokers.net. Don't hesitate to capitalize on a market in its beginning stages. Become our partner today!
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