Hedging with Binary Options

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Video Transcription:

Hello traders, welcome to the pro trading course and the six modules hedging. In this lesson we’re going to learn how to hedge with binary options. And let me be completely honest with you hedging with binary options is possible but it’s kind of tricky because of position sizing. I mean calculating the position size on a hedge that you are taking on the same instrument that you already have a position on, is pretty simple because you already know the position size that you are writing on your first trade.

But with binary options, it’s very difficult to calculate the risk. So the first thing you need to do is calculate stop loss distance of your hedge and that is going to be the risk you’re going to take with your binary option.

Hedging with Binary Options

Let’s say that you are writing one lot on the U.S. dollar Japanese Yen and the stop loss on your hedge is 35 pips. You are roughly risking 350 pips on your hedge. And basically you need to reach the same on your option, even though you’re probably not going to perfectly hedge your initial position because the payouts on binary options are flat. Now what I’m trying to say here, is that if you have a 35 pip stop loss on your hedge you are going to buy a $350 binary option to hedge your short position on the Japanese Yen. And we’re going to go to the charts and I’m going to show you why.

Hedging with Binary Options1

Let’s assume that you are writing this position down from 109 76 7 and you want to hedge here at this hedge ratios around the 107 80 level. And you enter here long with a hedge on the same instrument risking 35 Pips, but let’s assume you want to hedge your position with binary option. By risking the same amount of dollars that you are risking on your stop loss in the US dollar Japanese Yen hedge, you are basically doing the same thing. This means that if price goes against you, the position or the short position is going to gain $350 if it hits this stop loss or this level. And if you’re hedging with binary options and you buy a $350 put up – call option, I’m sorry, and price moves down, you are going to lose $350 from the binary option hedge but, you are going to be making $350 from the short position that you are already writing. So basically you are doing the same.

Hedging with Binary Options2

The only difference is that if price moves all the way up here that will be 178 pips, no I’m sorry 117 pips, and let’s say that you close your trade at 110, your hedge at 110. This would mean that by hedging right here on the US dollar Japanese Yen, you can make $1,100 on the hedge if it really balances from this area. But if you go to your binary options account and you go to the long-term options, we are the long-term options because we are trading the one hour chart. Remember guys that we only hedge with the medium-to-long-term positions. And if you buy a call option for $350 you are going to be making $612. It’s a little bit less than hedging perfectly a one-to-one but, it’s still possible to hedge with a binary option if you don’t want to hedge right here on the same platform.

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