The Importance Of Managing Risk While Trading In Binary Options

The Importance Of Managing Risk While Trading In Binary Options

In the world of management, risk and return are two sides of the same coin. This is so because of the fact that any trade that gives a high return is going to be risky at the same time i.e. without risk there is no return. There are many different investment options out there which might provide you with a high return, but there is none as lucrative as binary options. Binary options guarantee high returns, but there is a price to pay. Huge returns mean that the risks involved are also substantial in nature; hence it is very important to manage risk while investing in the binary options market.

Managing your risk in binary options trading involves formulating sound investment principles and strategies and following them at all times. One of the easiest and best ways of managing your risk while investing in the binary options market is never put in all your money into a single investment option. Many people, once they have devised strong investment strategies, end up putting a lot of money into a single trade. While this might lead to huge returns, but an unpredictable turn of events may lead to a loss of all the invested capital. The best way to go about this is to put in only 5 to 10% of your total capital into a single trade.

Another great method that can help you manage risk is making use of a hedging call. In case of a hedge you take a position that is opposite to any position that you have already taken in the market. This is done in order to limit any loss that might occur if your original options expires out-of-money. Let us take an example to illustrate it. Suppose you purchase a $1000 binary put option on barley thinking that the price of barley, which currently trading at $4.6900, would fall in the future. Now the terms of the option say that if the contract expires at $4.6899 or lower you get $1750 back for a profit of $750 but if the contract expires at $4.6901 you get $150 back for a loss of $850. In order to hedge such a contract you would opt for a second call contract.

Now, suppose that after ten minutes of trading, barley falls to $4.6895 but you think that it can rebound and go above $4.6900 so you purchase a $1000 binary call option having strike price of $4.6900. This way if the contract expires above $4.6895, you get $1900 back with a loss of $100. If the contract expires below $4.6895, you receive $1900 for a loss of $100. But if the contract expires between $4.6895 and $4.6900, you get $3500 for a profit of $1500.

Risk management in binary options trading is something that needs to taken seriously because even though the amount of money you can lose is limited, the risk of losing that money is rather high due to the high return nature of the investment option. Hence, it prudent for you as an investor to devise a risk management strategy that can help you get good returns without risking a lot.

Leave a Reply

Your email address will not be published.