Binary options trading in its most simple form presents a very unfavorable risk profile for a conservative binary options trader. In general a binary option trading platform offers returns of 60% to 80% for winning trades and offers 0% to 15% rebates for losers. So basically the expected value for one binary trade in the amount of $100 on a leading binary options trading platform is roughly -$23. So for every $100 you trade you should expect to lose $23, right? Well yes and no. If you decide to place one trade on one option during one expiration period then yes you should expect to lose $23 for every $100 you spend. However, I did say the answer was yes and no. To increase your probability of winning it is best you use a solid binary options strategy, one that can shift the odds of profitability into your corner. One such binary option strategy we at DerivStrategies.com recommend is the 2nd trade hedge strategy.
What exactly is the 2nd trade hedge binary option strategy and how can you implement it? Well the 2nd trade hedge binary options strategy involves buying a 2nd option on your initial trade to lock in a ‘profit zone’. This can best be described by example:
Say at 2:05 pm you purchase a binary call on Apple (AAPL) with a strike price of $250. Things go fairly well over the next 30 minutes or so and your $250 binary call is in the money trading around $252. But the lock-out period is fast approaching and you really are not comfortable leaving your position out there knowing that a sudden stock decline could leave you out 85%. Instead of risking the full amount of the trade, you can hedge some of the risk by implementing the 2nd trade hedge binary options strategy. Simply buy a binary put option on shares of AAPL with a strike price of $252. By doing this you have essentially locked-in an area of profitability, a ‘money zone’, with shares of AAPL trading between $250 and $252. So instead of losing 85% if shares of AAPL finished lower than $250 and winning 70% if shares of AAPL finished above $250 at expiration your risk profile looks like the following:
With shares of AAPL below $250 or above $252: You lose 15%.
With shares of AAPL between $250 and $252: You win 70%.
While the area of profitability is smaller under the 2nd trade hedge binary options strategy, the maximum loss amount has been significantly reduced from -85% to -15%. We recommend utilizing this binary options strategy whenever possible to effectively manage risk. To stay informed of alternative binary options strategies, hedging tips, broker reviews and such, visit DerivStrategies.com and subscribe to the Binary Options Weekly, a FREE weekly report preparing the binary options trader for the week ahead by providing insightful market commentary, key macro and stock specific catalysts, and recommended strategies and tips to boost your trading returns.
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