Trading Binary Options -FAQ, Strategies, and Rules

Binary options or digital options are commercial instruments that are traded during an agreed period of time with a pre-fixed return. Binary Options provide only two possible outcomes. Either you're in-the-money or you're out-of-the-money. A trader can profit by just predicting the direction of a price trend. No matter if the price of an asset has moved 10 pips or 50 pips -and either in case of a call option or a put option- the profit potential remains always the same. Every binary option that ends in-the-money offers a fixed payout. Usually, binary options offer Payouts 70-80%. Furthermore, binary brokers offer usually a refund 5-15% in case of an out-of-the-money option. 

Trading binary options are simpler than standard options as fewer factors affect their pricing. Opposite to standard options, binary options offer specific payouts based on small moves of a financial instrument. 

Which are the Underlying Assets?

The underlying assets of the binary options include stocks, indices, bonds, Forex currencies, and several commodities. Gold, Oil, and EUR/USD are the most popular assets in binary options trading.

How Are Binary Option Priced?

Binary options contracts are priced in a similar way as standard options. Traders in order to determine if there is value in buying a put or a call binary option they must evaluate three factors:

i) strike price

ii) underlying price of the financial instrument

iii) implied volatility of the underlying instrument

The two types: Binary call and put options

- if a binary trader believes that the price of an asset at expiration is going to be higher than its current strike price, he buys a binary call option.
- If a binary trader believes that the price of an asset at expiration is going to be lower than its current strike price, he buys a binary put option.

In-the-money & Out-of-the-money binary options

If indeed the price of an asset at expiration price is higher than the initial strike price then the binary option is in-the-money and the Payout is taken by the trader. If the price of an asset at expiration price is lower than its strike price then the binary option is out-of-the-money and the trader suffers losses. Usually, a refund of 5-15% is paid back to the trader's account by the binary options broker.

Binary option Breakeven Point or Tie

A Tie outcome at expiration is referred to as a situation when the strike price of an asset is equal to the price of the asset at expiration. In that case, the Binary Option is at-the-money and the 100% of the initial investment is returned to the trader's account (Tip: be fully aware of your broker's policies before you open a trading account).

Time-to-Maturity of a Binary Option

Binary options are usually traded in a wide time frame, from 5 minutes to 5 months.

 

 

PAIR OPTIONS

Pair Options are financial instruments in the category of binary options. This type of binary option is used to trade the relative performance of two stocks in a specific period of time. A trader buys a stock pair option if he believes that a particular stock will perform better in the future compared to another stock (for example Google stock Vs Apple stock). If the selected pair price movement is favorable for the trader –he receives a predetermined payout. If the selected pair price movement is unfavorable for the trader, the initial investment is lost.

The advantage of trading stock pair options is that you don’t have to worry about the general market trend. So you may gain a payout even if the general trend is bearish.

Trading Risk

When you buy a Pair Option your risk is limited to the initial cost of the option purchased as it is not a leveraged trade. Although the overall market risk may be considered high.

Option Expiry Time

Option expiry time can be set to a wide time frame between 1 hour and 5 months.

 

Some important Rules when trading Binary Options

a) Technical Rules

1) Focus on a couple and not on many underlying assets

Focus on a couple of underlying assets than on many assets. In that way is easier to analyze the fundamentals and to keep up with the latest news. Furthermore, it will be easier to observe periodical price fluctuations and get trading signals.

Example:

For example, the price of Oil tends to rise in September, when heating oil is ordered in advance, towards winter.

2) Find price correlations between assets

Find correlations between the price fluctuations of different assets and exploit that knowledge by purchasing put and call options.

Example:

The price of the US Dollar is related to the price of all commodities that are traded in US Dollars. At periods when the US dollar is weak, the prices of major commodities tend to rise, and vice versa. This correlation is very strong especially as concerns the prices of precious metals. Take for example the first decade of the millennium (2000-2010), the USD is weak against the EUR and the price of commodities is skyrocketing, especially the price of gold.

b) General Rules

3) Manage your Portfolio with Discipline

You are trading in a very risky environment and that is why you must trade wisely. Manage your portfolio constantly and eliminate the risk that you are not willing to accept. For example, if you will be soon obligated to make a withdrawal, avoid heavy trading for that period.

4) Develop a Binary Option Strategy

Developing and implementing a binary options strategy is crucial for every binary trader. A binary options strategy includes a pre-determined set of rules. This strategy must reflect the trader's long-term objectives and his profile, but also the accepted level of risk exposure. Furthermore, it is better to pick a strategy that will be flexible to any future market conditions rather than implementing one-directional strategies.

5) Take advantage of the special promotions and available bonuses

Binary options brokers offer several promotional packages and bonuses from 10% to 50%. Sometimes high bonuses are only available for professional or VIP accounts, in that case, prefer to wait and raise money to take advantage of the full deal and don't be in a rush.

"Learning to wait and acting only when the perfect timing occurs is rule No1 for professional traders".

6) Learn your partners and familiarize yourself with their platforms using their available demos

-First of all, it is highly recommended to review extensively many Binary Options Brokers before you choose one. AtTradingCenterthere are many binary brokers reviews available. In addition search about particular policies that you may be interested (for example withdrawal policies).

-Secondly, take advantage of any demo available by the binary broker and familiarize yourself 100% with its offering platform. "Practice will sharpen your skills and minimize your risk exposure as the first comer".

 

 

Here are some significant differences between Standard and Binary Options

ASPECT	STANDARD OPTIONS	BINARY OPTIONS
Risk Exposure	Risk Exposure is Variable	Risk Exposure is Fixed
Profit Potential	Profit Potential is Variable	Profit Potential is Fixed
Market	Standard Options are Traded on Secondary Market	Binary Options are not traded on Secondary Market
Right to Buy	Standard Options offer its holders the Right but not the obligation to Buy the Underlying Security	Binary Options does not offer such a Right
Collateral	A Collateral may be demanded by a standard option broker	No Collaterals are demanded by binary brokers
Expiration	Expire on the 3rd Friday of each Month of an Option Contract	Expire in a wide Time Frame (from 5 minutes to 5 months)

 

 

■ Trading Binary Options -FAQ, Strategies, and Rules

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