Binary Option Hedging with Call and Put Trades
All or Nothing Trades Don't Have to Remain That Way
All or Nothing Trades Don’t Have to Remain That Way
A binary option trade with a call and put can significantly reduce the risks associated with these quick turning, high yield contracts, and traders stand to gain from this strategy in this quickly expanding market. Trading this way requires a commission free, spot price trading broker (like this one – see their demo).
Can You Lock in A Winner and Make It Safer?
Like most hedging related strategies, a well placed binary option trade with call and put positions can have a dramatic impact on the risk reward profile of your net holding. Consider buying the up side of the contract and making a $200 contract with a strike price at $10 per share. Let’s say we are early in the hour (binaries expire hourly or at the end of the day depending on the terms) and your trade is decently in the money. Maybe the stock has gone up to $10.75 or $11.00 a share. Do you really want to hold that position for the remainder of the hour knowing all too well the market can turn with just the wrong set of news or sudden investor apathy? What can you do to lock in at least some of your gains in a supposedly “all or nothing” contract?
Consider another more detailed example:
A Binary Option Trade with Call and Put
How a Winning Position Can Be Hedged Before Trade Lock-out
One of the great risks associated with trading binary options is the risk of having a favorable trade suddenly turn sour and result in a loss. What many people don’t realize is that a binary position does not have to be an all or nothing outcome if you know how to setup and execute what ultimately results in a saddle position.
Binary Option Trade Example
Starting with a Binary Call Option
In our example we’ll presume that you have picked up a call option on Google stock and that option is presently in the money.
Presently Google is trading at $579.00/share today, so let’s work with that. Let’s presume you picked up a binary call option at 10:15am this morning that expires at 11:00am. Let’s also assume your option had a spot (strike) price of 577.50 per share and the contract size was $200, with a 75% yield in the money and a 15% yield out of the money. What are your present outcomes in this situation?
Analysis of the Payout Scenarios of a Single Binary Option
Static-State Analysis of Initial Trade Position
At this point you’ve got a good position – your $200 binary call option is in the money and so long as nothing changes your payout will be $350 ($200 investment plus $150 profit). If things turn sour and the Google closes below the strike price of $577.50 then you’ll receive $30 (15% return of investment with $170 loss). That’s a pretty wide disparity of potential outcomes.
How can you improve the likelihood of a more favorable outcome from this initial favorable position?
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Adding a Binary Put Option Hedge to an Initial In the Money Trade
Making a Straddle Payout Scenario Reduces Loss Risk
One way to mitigate the risk of losing a favorable position is to hedge the initial in the money call binary option with a new binary put position at the current spot price. Given in our scenario our Google stock is trading at $579.00 then a put option in the binary option market will have a spot price of $579. We’re worried about Google stock turning south out of our control, and binary option lock out is approaching (15 minutes prior to expiration). How can we improve our risk/return position given our present favorable binary option trade?
Taking a $200 put position in Google with a strike price of $579 and payout of 75% in the money or 15% return of capital out of the money creates a terrific hedge position for your in the money call option bought at $577.50 earlier.
How has your payout scenario for your binary option positions changed?
Payout Schedule for a Binary Option with Call and Put Positions
Starting with an “In the Money” Position Puts a Trader in a Powerful Position
You’re about to see why having an in the money binary option is a very powerful position to be in. Let’s re-cap where we are and how we got here. We started at 10:15am in the morning and bought a binary call option, investing $200 with a spot price of $577.50 in Google with a payout of 75%/15% and expiring at 11am. Later in the morning (around 10:35am) we’ve purchased a binary put option at $579/share. We’ve done this because we believe that there is a risk the market for Google stock might turn and we want to hedge our initial successful trade.
In order to see how good our hedge has been, we have to analyze this individual position payouts and sum them:
If the Google Price closes at $579.00/share exactly:
Our Binary Put Option is a push – returning our $200.00 investment
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $550. Net ROI: $150/$400 = 37.5% (not bad for an hour’s risk!)
If the Google Price closes above $579.00/share:
Our Binary Put Option is out of the money – returning our $30.00 of our initial $200 investment
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $380. Net ROI: -$20/$400 = -5% (not a tragedy)
If the Google Price closes between $577.51-$578.99/share:
Our Binary Put Option is in the money – returning $350.00 ($200 capital plus $150 profit)
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $700. Net ROI: $300/$400 = 75% (not bad for an hour’s risk!)
Our Binary Call Option is a push – returning our $200.00 investment
Our Binary Put Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $550. Net ROI: $150/$400 = 37.5% (not bad for an hour’s risk!)
If the Google Price closes below $577.50/share exactly:
Our Binary Call Option is out of the money – returning our $30.00 of our initial $200 investment
Our Binary Put Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $380. Net ROI: -$20/$400 = -5% (not a tragedy)
Binary Trade with Call and Put
Payout Recap
The ultimate result of hedging an initial successful (or in the money) position in a binary option trade by using an equal and opposite trade with the same expiration results in one of three payout outcomes:
If one trade is a push, the payout is a 37.5% profit
If both trades are in the money, the payout is a 75% profit
If one trade is in the money and one out of the money, the payout is a 5% loss
As you can see, this is a vastly improved profitability outcome versus our initial position of an “all or nothing” outcome of either 75% profit or 85% loss.
Reducing Risk Is One Way to Improve Trading Success
This binary option trade with call and put strategy high yielding day trading way to make money in the stock market. Open an account and get started with as little as $100. Don’t forget to take advantage of the bonus cash to get you a head start.
I would like to print this article but for some reason I am unable to. Please help. Thanks!
You ought to be able to print it… not sure what the hang up is.
Try the print button on the ‘socialble’ toolbar (which I’ll enable momentarily).