Hedging trades using binary options allows traders to breakeven on potential losses on their futures, forex and commodity trades. This morning was a great example on the EURUSD.
Hedging Trades Using Binary Options – EURUSD Trade
This morning the EURUSD was moving up. A slight retracement had occurred and an entry was generated at 1.1015. A long position (using two contracts) was placed on the EUR/USD forex side. However, what if the trade went in the opposite direction? After all, the market was at the R2 pivot line so a stronger retracement could occur. An easy solution was to place a binary option trade to the short side at 1.1015 (the exact same area as the entry on the forex side).
The stoploss amount on the forex side of the trade is $210. The profit potential, if price expires at 1.1015 or less, is $243.75 — in essence, recouping the loss over on the forex side. The total risk on the binary option side is $256.25. However, if price does move back to the previous high at 1.1030, then the loss is covered on the forex side of the trade if hedging trades using binary options.
The key to being able to hedge the positions is knowing the potential loss on the futures or forex side and offsetting this loss using a profit on the binary options side of the trade. Ins this case, the exact same entry price was available as a strike over on the binary option side so it made it easy.
The video on hedging trades using binary options below shows exactly what happened after the two entries were executed.
As the video shows, the binary option trade recouped the loss suffered over on the forex side. In other words, instead of being down $210 because the forex trade went against you, basically you are at breakeven — no harm is done to your account because the market did pullback stronger than you anticipated.