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Binary Options Trading and Hedging

Hi and welcome to the binary options trading tutorial this is Steve Wise and today we’re going to talk about the binary options hedge with a call and a put position and i just like to remind you that this video and audio content and the slides therein are the property of binary-option-broker.com and we’re distributing this on youtube so follow the guidelines on youtube to use this video if you want redistributed and just bear in mind the rules and regulations with regarded to using it. all right so with that out of the way let’s get started so let’s take a look at a couple slides i’ve made this first slide is your basic naked binary option trade and what we’ve done here is we’ve taken a binary option call on google we’ve taken a two hundred dollar position with a strike price at five seventy seven fifty per share that’s what it was at the time i made this slide in and made this discussion all the numbers all the details of this trade that we talk about are covered on the website binary-option-broker.com and you’ll find all the information in all the all the percentages and what have you uh…

There so if you have any questions about what the numbers are and what they are meeting where they all came from that’s all is going on the website but what i want to talk about in this video is that this kind of position taking a naked call binary option is very risky in it’s not the kind of investment that i see as uh… a favorable one for you the investor and the reason why i say that is because there’s so much downside risk and no protection if things go awry and that’s not the kind of trade i advocate what i prefer to do is i’d prefer to pair my binary option with another option either another security another option another binary option the underlying security itself maybe i already only underlying security and i’m trying to make up some profit on that uh…

Taking advantage of market movement downside upside what have you but the the point is any binary options I use I am using it to trade against another asset somewhere somehow so let’s take a look at how i do that when i pair a binary option call with a binary option put all right in this slide we’ve taken the call option from the previous example and we’ve moved time for the little bit towards closer towards expiration and what’s happened in this case is the price for google which was the underlying security has moved up to five hundred and seventy nine dollars a share so that’s created a window of opportunity once your binary option has moved in the money you have an opportunity to make a hedge and here’s how the hedge works when you have the seventy five percent yield and a fifteen percent payout on out of the money options as you can see the break even point is much much closer to where you are out of the money scenario is uh…

What happens is when you pair an in the money call with a put option when you hedge it fully with a put option now this is a full hedge we’ve taken a two hundred dollar binary call that was in the money and we put the two hundred dollar binary put against it and what happens is you create this little spread position where you have a window of opportunity where you still get the benefits of the seventy five percent yield on both two hundred dollar investments creating uh… potential seven hundred dollar payout or three hundred dollar profit in this case because your investment as you can see the red line is four hundred dollars you total investment is four hundred dollars most of the time you’re going to find your investment one it is going to fall outside this window of opportunity outside this what i call the goldilocks locks areas goldilocks box where you uh… where you make a pile of money most of the time your investments going to fall outside that window now the numbers in this case and we run through more on the website so goto website check out the numbers the numbers in this case workout so that you end up with a five percent loss or twenty dollar loss basically anywhere outside the goldilocks position switches between the strike price of the call and the strike price of the put the strike price of the call was five seventy seven fifty the strike price of the put was five seventy nine so anytime you end up outside those windows you’re going to lose five percent on your four hundred dollar investment which is twenty bucks okay so but losing their twenty bucks gives you the opportunity to make three hundred and that’s why I advocate taking positions more like this one rather then just doing a naked call i really have to reiterate that i am not an advocate of taking naked call position or naked put position for binary option anybody binary option trade i make i want to have some other play against it i’m either playing against another option another binary option another security or perhaps a forex cross rate or commodities trade whatever binary option contract I’m making i’m making it against security i either already own or intend own or want to own so that rather than increasing my risk i’m trying to make a hedge or play against risk that i’ve already taken and that’s the great beauty of the binary option because it presents a wall against either you will get what you want in the trade that you’ve already made you know the the trade that you’re trying to make or you get a payout in the form of a high yield binary option contract so that’s how i tend to look at things I always look at any investment i make against some other investment are I either can make have made or intend to make and i think that’s how you should look at your short term trading as well is that if you are making an investment or you’re making a trade or trying to make a play on a stock or an option anytime you’re looking at a binary option you need to look at that relative to whatever in other investment that you intend to make and not just take a binary position on uh…

In and of itself because that is very risky and you can lose money very quickly doing that that’s really what i want to talk about in talking about both the naked binary option and the binary option hedge and you can find more information both on this trade and other types of trades at binary-option-broker.com i think will put up uh… a spreadsheet where you can manipulate the numbers yourself we’ll just throw it up there and let you download it so that you can see and make your own positions and see how they work out and create payouts break evens and all that alright so i wish you the best of luck in your trading and i hope that this has been helpful and informative to you so that you can make better decisions with your trades and make better use of binary options It’s been really fun making this video and i hope you found it informative and i hope you make better trades as a result of it just a quick reminder this is steve wise for binary-option-broker.com this material video and audio is copyright 2010 all rights reserved from binary-option-broker.com you can find more information in our website and hopefully we’ll get the excel file up there for you to play with in the meantime i hope you have the best of success and i hope this has helped you understand how i think about trading and hopefully you’ll make better decisions as a result good luck and best of success to you and i hope all your trades are in the money.

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More info on Binary Options Trading / Hedging:
http://binary-option-broker.com/18/binary-option-trading-hedging-strategy/
In this binary options trading tutorial we discuss the advantages of hedging an in the money call option and my personal philosophy on the usefulness of a binary option in trading stocks.

One fear people have about trading binary options is the possibility of losing their entire investment. What if that didn’t have to be the case? What if it was possible to either hedge your binary options trading position to set a floor where losses were minimized and gains of upwards of 70% yields were still possible? Would that make binary options trading more attractive?

Take a look at how we see the world of trading binary options.

http://www.youtube.com/watch?v=KOVuBP4ucXU

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