Currency in Focus: Using Binaries to Protect Your Portfolio

How quickly markets can change…

And that got me thinking about other ways to use binaries. Specifically for portfolio protection.

I spent a week at the Agora Financial Investment Symposium in Vancouver. It was a great opportunity to hear my colleagues’ thoughts on the economy and learn what readers think about binary options. (If you missed my binary options tutorial, click here.)

#-ad_banner-#A key message of the conference, driven home in Agora founder Bill Bonner’s closing address, was that U.S. economic conditions are “going to the cellar.”

Today it looks like investors are getting the message. That makes it more important than ever to diversify and protect your portfolio.

And binary options can be an important part of that strategy. I’m not talking about their ability to add speculative gains to your bottom line. Instead, I mean using them as a form of protection and insurance.

When you use binary options as a protection tool, the goal is to insure your portfolio against a big financial move down. To do that, you can use our old friend, the deep-out-of-the-money (DOOM) binary.

For example, let’s say you have large exposure to U.S. equities…

Historically, gold is one of the most reliable hedges against large drops in equities.  As stock indices fall, gold tends to go up. And gold binaries offer a quick and affordable way to capture gold’s hedging abilities.

See, most Monday mornings you can buy a deep-out-of-the-money gold option for around $20. That $20 buys you $80 of profit potential— and a 100-lot position offers a potential $8,000 net gain against a $2,000 cost.

So if you have a $100,000 stock portfolio, in theory, the binary position offers protection for an 8% drop in stock prices over the week. As stock prices plummet, you can expect gold to go up, pushing your binary into the money.

It essentially acts an insurance rebate that pays you when there is financial storm damage.

Keep in mind, this kind of play is not designed to always work. It’s strictly there for protection. And adjusting the position size can increase or lower your costs while maintaining an insurance effect.