One of the appeals of binary options trading is how fast paced it is and how quickly you can create a profit. The Bungee Strategy is perfect for traders that operate at a quick pace and need to take out hedge positions on occasion. Like all trading strategies, this method does have both strengths and weaknesses, so let’s go over how to use is and what to look out for.
Applying the Bungee Strategy
There are many different variations of this strategy, but the end goal is that you have established one solid position, and then right before the expiration of that position, you take out a trade on the same asset in the exact opposite direction. This works best when there’s been very little movement on your primary position, and there is a strong chance that your original trade has gone from having decent odds of being successful to being a complete coin flip.
So, let’s say that you have a one-hour call option on the USD/JPY, and the price hasn’t moved much 55 minutes into the trade. Now, you should start looking at a put option on this same asset, preferably one that will expire at the same time that your existing trade will. Now that you have watched your asset’s price hover in the danger zone for a moment but it is still currently a winning trade for you, look at a put option to offset the risk. At this point, the outcome is almost impossible to deduce, so a put option will allow one of a few things to happen. One, the price will go up, making the put option a losing trade, but the call option a winning one. Two, the price will drop, and the call option will be a loser, but the new put option will be a winner. Or three, the outcome that is most desirable, the price will finish in the sweet zone right in between both prices, making both end up paying for you.
As you can see, there is potential for a loss here if the secondary trade proves to be unnecessary. That is why this method should be used sparingly, and only when you are truly certain that your first trade only has a 50-50 shot of success. At this point, you have a negative expected value because of the higher loss amount than gain amount, and while the second trade is designed as a hedge, your expected value is still negative—just not by as much. Your analysis skills need to be at an expert level or higher for this method to have any sort of long term merit. Otherwise, you will just find yourself second guessing your original trade decision.
Drawbacks Could Happen
The biggest drawback to this strategy by far is the fact that it can entail a huge amount of needless risk. If you rush through this when establishing the secondary position and do not have the proper approach, you can experience a pointless loss. That’s the exact opposite of what you’re going for, and unless you are very careful, you should not put yourself in this situation.
In the end, this strategy has potential to be very successful, but in most instances, it ends up being more closely related to gambling than to well-informed trading. Most people should avoid the Bungee strategy, but it does have a level of use when it is applied correctly.
Again, as mentioned above, this method will just lead to second guessing if you are not an expert trader already. Rather than use this method without need, it is better to refine your analysis skills so you are not hedging positions that do not need hedging.
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