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What does hedging mean?

Hedging is a strategy that is employed by various traders to reduce the risk of investment by various methods like the call and put options, future contracts or short selling techniques. The hedging strategies are designed to reduce the Proven Profits potential volatility and risk of a portfolio or an investment by reducing the risk of loss. Basically it gives the benefit of locking the existing profit. Hedging strategies are most often used while trading forex and binary options are also used along with hedging strategies to minimize the risk of loss.

For quite some time now, binary options have been used for day trading. Though it may sound strange but a trader who has thorough knowledge of binary options can use it for partial hedging. It also gives an opportunity to reap in more profits. Wise usage of the call and put options can reduce the risks to a greater extent. In fact double profits can be made if the binary options are executed properly.

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As a trader you know that most of the binary trades expire either at the end of the day or on hourly basis. If the price of a particular share is say $20 and you can earn a profit of $200, now if the prices go up as your prediction, within the hour before expiry, you have the option whether to hold the share or sell it before expiry. The decision of holding back the share depends on many factors. The future market depends on news and other sources of information which helps the traders analyze the market.

Now in this particular case, you can either use partial hedging or complete or full hedging. Full hedging implies selling of all the shares in this scenario. This would bring in the profits at the given moment. Partial hedging implies holding back some shares while selling a part of them. Although there is some risk attached as the trade to a certain extent is still open, but loss of risk on the shares sold is reduced. If at the time of expiry, the trader's prediction is correct, he would still make the profit but without the involvement of any risk.

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