Jan 26 | Posted by Joe Best

The 4 Features of Binary Options Trading

If you’re exploring the world of trading there’s a chance you’ve already looked into stocks and currency trading, and possibly even trading commodities such as gold.  But there’s another way to trade the financial markets that allows you access to OTC derivatives and that is through binary options.  Binary option trading is a trade type that continues to gain popularity across the world because traders see it as a conceptually simple way to gain access to global financial markets.

 

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In case you’re unfamiliar with binary options here is a quick explanation of how they work:

  • First you choose an underlying asset that you wish to trade. This could be an individual stock, an equity index, a currency pair, or a commodity.  Binary brokers do have a limit on which underlying assets are available to trade, but there are still more than 100 to choose from, and all the most popular are represented.

 

  • Once you know which underlying asset you’ll be trading you decide if you think the price of that asset will be going higher or lower

 

 

  • Decide on a time frame for the price move of the asset. This could be as short as 60 seconds, or as long as a month in some cases (although binary option trades longer than the daily time frame aren’t the norm).

 

  • Place your trade and wait for the expiration of the option. If the price moved as you predicted you could win as much as an 86% return on your initial investment.  But if your prediction was wrong you lose the entire investment amount.

 

Binary Options trading carries high risk and is not suitable for all investors. You can lose your entire invested capital. Please ensure you understand all associated risks.

 

As you can see, binary options can offer rewards when your trade is a winner, but there are certainly risks to consider as well.  Many traders have come to appreciate the binary nature of the options however, as they can more easily manage their risks by knowing the potential gain or loss coming from each trade.  Others appreciate the fast paced nature of binary option trades, where you know the results of your investment in as little as 60 seconds.

 

 

While there are certainly risks associated with trading binary options, it also offers some unique features that you won’t find when trading in traditional financial markets.  I’ve outlined those 4 features of binary option trading in greater detail below:

Variety of Assets Types

If you want to trade multiple assets in the traditional manner it can be quite complex, especially if you are trying to hedge by trading related assets.  You can’t simply trade currencies from the same account as stocks, and the same goes for commodity trading.  With high capital requirements for each asset type in traditional brokerage accounts you would need multiple tens of thousands of dollars if you want to trade stocks, currencies and commodities.

 

Binary options trading does away with all that by offering all the different underlying asset types all in one account.  You are able to trade binary options on major global stocks such as Facebook and Deutsche Bank, global equity indices like the FTSE 100 or the Nasdaq, major currency pairs (and some exotic pairs as well), and commodities like gold, oil and even corn, all in the same platform, without taking ownership and with significantly lower capital requirements.  This can make it potentially easier to diversify risk across asset types as well as managing risk due to the predetermined calculations of profits/losses.

 

Choose An Asset and Trade

 

 

User Friendly Trading

Because you have few decisions to make when placing a binary options trade they can be a conceptually simpler way to trade.  The trading interface, or platform, used in binary options can be less complex than the traditional trading platforms.  In many cases all you need to do is click a higher or lower button on your underlying asset of choice, fill in the investment amount, and place the trade.

 

Binary option brokers have spent countless hours aiming to develop and create platforms that even those who are not technologically savvy can understand.  There is no need to worry about margin or leverage, no considering stop loss and take profit levels, and in most cases no confusion.  Simply choose an underlying asset, make your analysis, decide on the direction of price, set an expiry and investment amount, and place your trade.  And since everything is decided before placing the trade there is no need to worry about the complexities of managing open trades, which can become quite hectic for the traditional trader.

Fast Paced

One feature of binary options that is especially favored is the quick results.  With expiries on binary options as short as 60 seconds traders find that they can complement their long term trades and take advantage of trending markets with binaries in a way that simply isn’t possible using traditional trading methods.  Using binary options a trader can be in and out of a trade in just 60 seconds, and while this may not be suitable for everyone it does provide a welcome flexibility and an excitement to the traders’ activities.

Well Defined Risks

There’s no denying that trading binary options is a risky venture as you can lose your entire investment with each trade.  However, this also makes it attractive because your risks are well known on each trade.  There is no question of how much you could lose, or how much you can win on each trade.  Both are clearly defined, which actually makes binary options good from a risk management perspective.  It can also make binary options less stressful because there is no second guessing as you watch price move back and forth.  Binary options do away with the need to constantly re-evaluate your risks as you try to decide when to sell an asset.
In Conclusion

When it comes to trading it makes sense to understand the features of your selected investment instrument as much as possible, and that’s exactly what the four features of binary option trading aim to do.  By offering a broad variety of underlying assets, user-friendly platform with flexible expiries, and well predetermined risk, binary options have added to the experience for traders all across the globe.

 

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Trading binary options involves substantial risk and may lead to loss of all invested capital

Jan 26 | Posted by Joe Best

Strangles and Straddles with Binary Options

Spot forex has long been a popular trade method for those interested in participating in financial markets.  Recently some forex traders have also become interested in trading binary options because they wish to explore other financial instruments that operate differently to forex.  If making the move from trading spot forex to binary options sounds interesting to you read on, because there are actually some real differences you should know about that could help you whilst trading

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When trading spot forex you are only interested in the direction price is moving for the currency pair you’re trading.  If you think price is headed higher you would place a long position, and if you think price is heading lower you would put on a short position.  With binary options things can get a bit muddier as you have several ways you can speculate on price using the different types of binary options.

 

Chances are if you decide to use a binary options trade you feel that price will be higher or lower at the end of the day, but not by enough to justify a spot forex trade.  Because a binary option will finish in the money/out of the money evenhen it is just 1 pip above (or below) your strike price it is a more logical choice in this case as far as your potential profits are concerned.  There’s also the possibility that you feel price will remain close to unchanged levels and trade in a tight range.  Binary options can be quite useful with this type of market as you can use option types such as boundary options or no touch options to speculate on a flat market such as this.

 

There’s really no way to profit from this type of market with spot forex, so binary options can fill a void in this case.  Finally, you might want to use binary options to hedge trades, either by themselves or together with one of your spot forex trades.  If this is the case you’ll need to understand some of the strategies employed when hedging, and two of the most common are the strangle strategy and the straddle strategy.  I’ll discuss both in greater detail below to help you get a better understanding of how they work.

Long Short

Strangle Option Strategy

The Long Strangle

There are times in the market when you are pretty sure price will move significantly, but you aren’t sure in which direction.  This is a good time to consider using a strangle option strategy.  One common time for such a set-up is during a major news release such as U.S. non-farm payrolls, or around the monetary policy statement of any major central bank.

 

With the long strangle strategy you purchase two options with the same expiry time, but in different directions and with different strike prices.  The strike prices you use on the put and call option will depend on what your expectations are for the direction price is likely to take and how strong the move will be.  In the case of using binary options for this strategy this is the same as purchasing a boundary option, where the winning condition is for price to close outside one of the boundary levels.

The Short Strangle

The short strangle strategy is used when you believe price will remain tightly contained within a range.  It can be used for underlying assetshat typically don’t move much, or during quiet times in the market such as the Asian session or the time between the close of the North American session and the open of the Asian session.  With traditional options it works the same as the long strangle strategy, except instead of buying a call and put option you would sell a call and put option with the same expiry and different strike prices.  Using this strategy with binary options would also mean using a boundary option, but in this case you would use an inside boundary in which case you need price to end between your boundary levels to have a winning result.

Straddle Option Strategy

Both the long and short straddle strategies are similar to the strangle strategies explained above.  There is just one key difference, and that is that the straddle strategy uses puts and calls that have identical strike prices.  They still have identical expiry times as well.

 

In the case of the long straddle one has to use options that have expiries which are long enough to ensure the profit from one of the options will be larger than the premium paid for both options.  If you are using binary options this simply means using options with longer expiries, perhaps a day or longer, as there are only two outcomes for a binary option, which is a winning option or a losing option.

 

The short straddle is the riskiest of these strategies when using traditional options because it leaves little room for price movements, but with binary options it can still be profitable.  Though one always needs to keep in mind with binary options that a losing option means the loss of all the invested capital.

In Conclusion

One way to begin looking for opportunities to use these strategies is to look for currency pairs that have strong resistance above the current price level as well as strong support below the price level.  This situation will typically allow for movement within the normal daily range for the pair, but will keep the pair contained within the support and resistance.  In this situation a short strangle that has its boundary levels just beyond the support and resistance levels could make for a winner.

 

Another way to look for opportunities with this strategy is in trading around important news releases as mentioned above.  In this case you would also want to look for support and resistance levels and place your boundary levels just below resistance and above support.

 

Hopefully this post will give you some new ways to look at price action in the forex markets and some ideas for your own trading.  These are meant to be conservative strategies, so don’t get crazy when using them and always remember the potential for losses when trading in binary options.

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Trading binary options involves substantial risk and may lead to loss of all invested capital