Everyone who trades binary options needs to be aware of ways in which they can reduce risks. The strategy that will be outlined here is one that can do just that, by reducing loss amounts when the market moves against you. Under certain circumstances, it can also provide a profit, even when the price of the asset that you initially selected did not perform as expected. This strategy is not overly complex, so traders of all skill levels should feel confident in using it within their chosen trading platform.
If you’ve been trading for a while, you may have seen this strategy being referred to as a ‘Fence’ or a ‘Straddle’. These names relate to the fact that two positions are purchased, both Put and Call, which would mean that you are on both sides of the fence, or straddling the trade. Why on earth would anyone want to purchase opposing options? The answer is simple. If the price of the asset starts to move against you, purchasing the opposing option could provide you with a contract that would finish in the money and reduce or eliminate the loss amount of the losing position.
Imagine for a moment that you entered into a Call trade on gold. Your analysis told you to expect the price of gold to trend upward for at least the next 30-minutes or so. However, once the trade opened, you realized that the price of gold has stopped climbing is trending back downward. If you do nothing, your position is highly likely to finish out of the money, at which point you’ve lost your investment amount. But if you act quickly, a Put option on gold could be purchased to counteract the negative impact of the Call option.
Sounds like a great idea, right? Well, it is, but you must know that there is no guarantee that the second option purchased to counteract the first will finish in the money. There does exist the risk that both positions end in loss. But then there also exists the chance that both end in profit. Since the risk level can be high, how should you go about deciding whether or not to use this dual trade method? Refer to your price chart and market news. Depending on the expiry time you’ve chosen, there may not be much time for extra analysis, but there should be at least a minute or two for confirming the current direction of movement.
The success rate of this strategy is going to depend on several things, but will rely most heavily on how and when you use it. Although this method is not going to be appropriate for use every time a trade starts to move against you, it can be a powerful way to stop losses and even lock in profits when a reversal takes place while a contract is live. As is recommended with all binary options strategies, test out this method several times on paper before actually using it to get some practice in and avoid any problems.
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