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By Shobhit Seth Updated Mar 19, Binary option trading had been only available on lesser-known exchanges like Nadex and Cantor binary options 1500, and on a few overseas brokerage firms. However, recently, binary options 1500 New York Stock Exchange NYSE introduced binary options trading on its platform, which will help binary options become more popular.

Compared to the tradition plain vanilla put-call options that have a variable payout, binary options have fixed amount payouts, which help traders be aware of the possible risk-return profile upfront. This article discusses how binary options can be used to hedge a long stock position and a short stock position.

  • How To Hedge Stock Positions Using Binary Options
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To purchase a binary option, an option buyer pays the option seller an amount called the option premium. For exchange-traded binary options defined on stocks, the condition is linked to the settlement value of the underlying crossing over the strike price on the expiry date. If the condition is not met, the option seller pays nothing and keeps the option premium as his profit.

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In either case, the seller benefits if the condition is not met, as he gets to keep the option premium as his profit. With binary options available on common stocks trading on exchanges like the NYSE, stock positions can be efficiently hedged to mitigate loss-making scenarios.

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  • If we have to sum up everything said so far, it would add to saying: every binary options trader tries to forecast the future direction of currencies, stocks or commodities it is a matter of personal choice, but more on that topic later.
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Her long position in stock will incur losses when the stock price declines. Marrying the two can provide the required hedge.

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A binary put option can be used to meet the hedging requirements of the above-mentioned long stock position. A standard binary option lot has a size of contracts.

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One needs to purchase at least binary option contracts. This is also called the option premium amount.

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Here is the scenario analysis according to the different price levels of the underlying, at the time of expiry: Underlying Price at Expiry.