Binary options can be an easy way to hedge against your long term investments. Hedging is a strategy typically only used by experienced traders and professionals. However, if you are a skilled trader you can still use this profitably–even if you are not doing so at a professional level or putting your money into a hedge fund. There are complicated hedging strategies that exist that you should probably stay far away from, but there are also very simple ones out there that are very easy to master. For example, if you own a mutual fund that mirrors the S&P 500, days like Thursday, August 20th, probably did not do wonders for your investment. However, by buying a series of binary put options that took advantage of the S&P’s 2.11% drop, you could have offset your losses a bit. Even if you had a sizeable, 6 figure loss, there are ways to help you avoid the sting a bit.
The most obvious hindrance from using a method like this is available cash. If you have investments that total $250,000, a 2% drop is equal to a $5,000 loss. By purchasing 20 short term binaries at $100 each, you could have made a profit of $1,600 if you were making 80% per option. However, the odds are that you would not win often enough with these to make quite this much. If your timing were very good, you could expect around $1,000. That’s not bad for a day’s worth of trading, and it does cut your losses by 20%, but is this sustainable? What if you were wrong for your first 5 trades? Is that $500 loss right off the bat disconcerting enough to encourage you to start making bad trading decisions? These are some of the drawbacks of using binary options in this way, and they are definitely worth spending some time thinking about before you begin.
One other thing to consider is the fact that this might be something that could take several days or weeks to right itself. Over time, you will find that making this many trades and timing them as best as possible is very time consuming. Trading for a living is a possibility, but if you don’t, you probably won’t be able to make many well-informed trades on a daily basis. Hedging in this manner is not complicated, but it does take some skill and timing, and if you rush it, there’s a good chance that you could just be throwing even more money away.
Should you try to hedge? That depends on your knowledge of trading and your comfort level with the extra risk you are taking on. Binaries are used in this version of the method because they are simple to understand and do eliminate the risk a little. They are still a risk, though. There’s a strong chance that the S&P will recover over the next few months. There’s no guarantee that any of your binaries will be correct in their prediction. It’s not likely to happen, but it is a small possibility. Hedging is intended to decrease your losses, there’s no point in trying it if you are likely to lose even more. Also, consider the fact that there are alternatives to recoup losses. If you’ve lost money in a big dip, it can be a good idea to put even more in. The major indices trend upward, and have for years. Buying when the market is at a relative low is extremely likely to give you long term gains. So, hedging with binary, while it works, is not for everyone.