Binary option trading in its most simple form presents a very unfavorable risk profile for a conservative trader. In general a binary option trading platform offers returns of anywhere between 60% and 80% for winners and offers somewhere between 0% and 15% rebates for losing trades. So basically the expected value for one binary options trade in the amount of $100 on a leading binary option trading platform is roughly -$23. So for every $100 you wager you should expect to lose $23, right? Well yes and no. If you decide to place one trade on one option during one expiration cycle then yes you should expect to lose $23 for every $100 you spend. However, I did say the answer was yes and no. To improve your probability of winning it is best you use a solid binary option strategy, one that can shift the odds of profitability into your corner. A binary options 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 utilize it? Well the 2nd trade hedge binary options strategy involves buying a 2nd option on the initial trade to lock in a ‘money zone’. This can best be described by example:
Say at 2:10 pm you buy a binary call option on Apple (AAPL) with a strike price of $250. Shares of AAPL move your way over the next 30 minutes or so and your $250 binary call option 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 option strategy. Purchase a binary put option on shares of AAPL with a strike price of $252. By doing this you have basically locked-in an area of profitability, a ‘profit zone’, with shares of AAPL trading between $250 – $252. So instead of losing 85% if shares of AAPL finished below $250 and winning 70% if shares of AAPL finished higher than 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 using this binary options strategy whenever possible to effectively manage risk. To keep up to date on alternative binary options strategies, trading tips, broker reviews and such, visit DerivStrategies.com and subscribe to the Binary Options Weekly, a FREE weekly report preparing binary options traders for the week ahead by providing insightful market commentary, key macro and stock specific catalysts, and recommended strategies and tips to boost your trading profits.
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