Let us take a look at how to use binary option as a hedge. if you are closely monitoring your option during the period, there
may come a time where you see that your asset is almost certainly going to close in the money. Many traders are happy to just
wait it out and collect their profit, but others see this moment as a chance to hedge their investment and make even more
money.
For example:
you have bought a call or rise option on a particular contract or stock because you believe the price will go up during you option period.
when you are following your option closely, and you see that the contract or stock is indeed going up, and you still have few minutes left before your option is set to expire, you can either wait or you can choose to hedge you option.
The idea of hedging is to protect your original option.
if you choose to hedge, you will now buy a put or fall option at the new price on your contract or stock.
you now own two distinct binary optyion on the same contract or stock
There are now three possible outcome:
if the price still rise after you have purchased the put or fall option, you will be in the money on your call or rise option and out of the money on your put or fall option at the time of expiry, you will lose a small percentage, which is made up of the difference between the profit on the call and the loss on the put.
if the price drops below your original strike on the call or rise option, you are now in the money on the call. your loss is the same as mentioned above.
if the price falls from the strike price on your put option, but is still above the strike price of your call option then you have made a successful hedge.
your are in the money on both your orignal call option and your later put option and your profit from both investments.
the reason you deciede to hedge in thge first place in this scenario was to cover your losses in case the contract or stock price fell in the time still left in the call option. if that was the case, and the price did fall, the hedge helped you cover your losses
if it fell by only a bit, the hedge offered you the chance to increase your profits
note :
it is worth while to remind investors that heging only works if you are closely monitoring the progress of your option all
the way up to its expiry time
