Trading Binary Options: Opportunities and Risks

Trading Binary Options: Opportunities and Risks

Traders are in constant search for alpha. They will do whatever they can to grow their account. Luckily, there are various ways of doing this in terms of the asset classes. For instance, there are traders who are perfect at trading gold while others are perfect at timing indices. Other traders are masters in trading bonds. Other asset classes include equities and indices. There are other traders who have mastered the art of timing in terms of options. Traditionally, option trading involved timing the market movements in longer durations such as months and years. Today, this has been reduced to seconds through what is called binary options. Simply stated, in binary options, a trader makes a prediction on whether a particular asset will move up or down within a certain expiry period. If it moves in his direction, the trader makes a commission but if it goes in the opposite direction, he loses his bet.
Let’s consider an example. Assume that the EURUSD pair is trading at 1.07946 and the trader bets that in the next 5 minutes, the pair will go up. The trader then takes $100 and places a CALL trade. Assuming that the broker is offering a 40% commission on a winning trade, the trader will make $40 if the pair goes up. (40% X 100 = 40). Therefore, the trader will have a balance of $140 in his account. If on the other hand the trader placed a PUT option predicting that the pair will go down, the trader would have lost his $100.
Types of binary options
There are three types of binary options in the market today. The first one is called up/down or high/low binary option. It is the most common in the market today. In this binary option, a trader simply buys a call option if he predicts an upside or a put option if he predicts a downside. The example shown above is a good example of how this type of binary options work.
The second type of binary options is known as the touch options which is divided into one-touch and no-touch options. As in the up/down options, one needs to place a call or put option and the expiry period. The difference is that the price level only needs to touch the level the trader has indicated at least once. If this happens, the trader will receive a commission. In no-touch option, the market price should not touch the strike price before the trade expires. Another difference between the touch and the up/down is that the former is only offered at certain times during the day. It is also offered during the weekend where the commission is usually high. In many occasions, the commission can go as high as 400%.
The third type of binary options is known as range options. This is significantly different from the two types above. In range trading, the market price of the asset must stay within a certain predetermined range. It must also avoid touching the two strike prices within the duration of the trade. For instance. Let’s assume that the GBPUSD pair is currently trading at 1.3300. Let us also assume that there is a major economic data coming up. Your broker is now offering a range trading opportunity between 1.3279 and 1.3318 that expires within 30 minutes. After your analysis, you decide to buy an in-range option. You will now win the trade if the price does not reach the range you had traded at.
Analysis for binary options
As with other types of trading, the most important types of analysis are: fundamental analysis, technical analysis, and sentimental analysis. In most cases, these are mostly important for longer term trades. For short term trades, such as those with a one minute expiry, it’s usually not possible to accurately predict the movement of the market unless in periods of increased volatility.
As I have explained before, fundamental analysis is the study of the prevailing economic and intrinsic environment. For instance, one can make decisions based on upcoming earnings or economic data release.
Technical analysis on the other hand entails the use of technical indicators such as MACD and Moving Averages to make decisions. Lastly, the sentimental analysis entails looking at the overall market environment and consider whether investors are willing to make certain decisions. Finally, you can combine the three techniques to base your investment decision.