The term binary is defined as “relating to, composed of, or involving two things.” The binary options trading is derived from two options in finance: all or nothing. The binary options trader should predict whether an asset’s price is above or below a particular price in a predetermined time frame. This yes or no proposition […]
The term binary is defined as “relating to, composed of, or involving two things.” The binary options trading is derived from two options in finance: all or nothing. The binary options trader should predict whether an asset’s price is above or below a particular price in a predetermined time frame. This yes or no proposition is possible and profitable if a binary options trader knows some basic rules and strategies. The basic binary options trading strategies consist of fundamental and technical elements reviewed shortly in this article.
1. Technical elements :
The intrinsic value of an option and the strike price should be explained to understand the meaning of an in-the-money option; The intrinsic value is assessing a stock’s worth. The market analysts assess the intrinsic value of an option based on technical and fundamental analysis. The strike price has been defined as “the point that an option can be sold and bought.” Each term has been explained shortly, and the two technical terms are yet more intriguing and need more analysis. Now in-the-money option can be defined as an option that bears an intrinsic value in a strike price. The term “in the money” (ITM) relates to an option that has intrinsic value. As a result, ITM means that an option has a value at a strike price that is lower than the current market price of the underlying asset:
–An in-the-money call option allows the investor to purchase the security at a lower price than the actual market price.
–An in-the-money put option allows the investor to sell the security at a higher price than the actual market price.
The term is very subjective and refers to the high probability of prices being settled as a win. The intrinsic value of the deep-in-the-money options is maximum and the time value is disdained, and the traders who put on DITM have joined the crowd. An option that is deep in the money has an exercise or strike price that is slightly lower (for a call option) or higher (for a put option) than the underlying asset’s share price. The value of such an option is almost entirely intrinsic, with just a small amount of extrinsic or time value. Options with deltas of 100 or less are considered deep in the money.
Another strategy to play with the market trends is out-of-the-money trade. Trades of this kind indicate that the price will continue to rise sharply, and it only bears extrinsic value. OTM options are less costly than ITM options. This makes them more appealing to traders with limited funds. Trading on a shoe-string budget, though, is not recommended. One way to use OTM is to buy options if you foresee a significant change in the market. Buying an OTM option is an appropriate option because OTM options have a more negligible up-front cost (no intrinsic value) than ITM options. For example, if a stock is currently trading at $100, you can purchase an OTM call option with a strike price of $102.50 if you believe the stock would climb far above that price.
This strategy is a type of anticipation trade, and binary options traders take the risk. Let’s make DOTM more tangible with an example. Let’s assume that the price of an asset is $80; an option with a strike price of $55 is examined as a DOTM.
Both in-the-money and out-of-the-money options have advantages and disadvantages. The one is not superior to the other. Rather, all types of traders and option strategies are accommodated by the different strike prices in an options chain. Whenever you tend to buy these kinds of options, your decision is based on your outlook for the underlying security, your financial position, and your goals. Understanding the fundamental forces that act as market movers can help binary options traders. Some examples are Gold, Crude oil, and the US elections.
2. Fundamental Elements
Gold has been acting as a safe zone for global capital for several centuries. The forces linked to the gold market are fear of inflation and deficit. As a result, the gold market is a reliable trading activity with low risk and a controlled environment with small margin requirements.
2.2. Crude oil
The significant price factor in the crude oil market is the concept of demand and supply. The supply and demand oil chain is a vast field and needs a perspective view. As a tangible example, in 2011, after the revolts in Tunisia and Egypt, the volatility of oil raised, and the price soared to $100. A binary options trader at that point could make an at-the-money trade.
2.3. The US Elections
In November 2012, when the rhetoric among US presidential candidacy soared, many binary options traders ride the volatility. Other political campaigns like Labor Day and Congressional elections also are appropriate events to trade on volatility in binary options.
3. The Doom Strategy:
The doom strategy is related chiefly to the deep-out-of-money plays. It occurs when markets go crazy, and the binary options traders, when experience sell-offs, can gain huge profits.
4. Correlation Trades
Correlation trades are those assets that are highly correlated in their movement in the financial market. For example, the movement of USD/CAD and crude oil is highly correlated; when the price of crude oil soar, the USD/CAD price plummet.
5. Combination Strategies
In binary options trading, many experts recommend a single strategy set. However, at some points, combination strategies can be profitable. For example, when a trader puts one in-the-money trade and three deep-out-of-the-money trade, they use the combination strategy trade.
6. Trading Event Risks
The event risk analysis is different from the regular analysis of the market. This strategy is related to the financial data released: jobless claims, payroll reports, etc. The primary sources which release the data and the trending patterns should be taken into account to analyze the event risks.
7. Intraday Strategy
Some binary options traders use the intraday strategy. This strategy utilizes the same strategy with different time frames. A profitable intraday strategy requires an understanding of volatility, momentum, and technical analysis.
For binary options, trader applying strategies is challenging. There are many variations in binary options strategies, and we have tried in this article to explain some basics briefly. The strategies are based on three technical, fundamental, and sentimental domains. Traders should try to pick their strategy and compare them with market conditions. It is highly recommended that the binary options traders try all strategies over time to build their trading skills.