Binary Options Strategy: The Fundamental Approach

Binary Options Strategy: The Fundamental Approach

Submitted by adil on Thu, 02/27/2014 - 07:29

This is an information age because information travels very fast, and whoever gets it first and knows what to depict from it ensures enhancing his probability of success. For a trader in financial instruments, including binary options, it is imperative that he always stay up to date with relevant information that has the potential to affect the prices of assets. The trader needs to keep in his knowledge how changes in different variables of information act to affect the price action.

The trader can always form good trading decisions based on the information he gets from news releases, political events or economic releases. This gives these types of information a strategic depth and severity, which the trader must not ignore. The trader can speculate on the price movement based on news releases, political events or economic releases.

For example, assume that you want to trade EUR/USD, amidst coming out of jobless report. The market expects or forecasts that the jobless claim is going to be 350,000. You expect the market to react once the actual figures come out. Further assume that currently you can purchase a 1.30 EUR/USD option at $30, and sell a 1.28 EUR/USD option for $75. The total exposure for setting up this position will be $30 premium and $100 less $75 for short sell ($25), that is, $55. If your expectation of market reaction is wrong, you will lose $55. If however, you are right, and the EUR/USD pair closes above 1.30 or below 1.28, you will win one leg of the trade and receive a settlement amount, less the loss on the other leg of the exposure.

Similarly, there are political events that affect the price action. For example, election of a US president may have an impact on the energy market, if that president as a candidate had stated a policy of extra reliance on fossil fuels. The affect is likely to be an increase in the futures market, gradual if not immediate. Here again, you can take out a position similar to above in the oil commodity market.

If you know that there will be a movement in the market but are unsure of how the market will react or who will be elected, you can enter a long volatility strangle trade. If you know that the market will not react drastically, then you should enter a short volatility strangle trade. As the name suggests, you will be strangling the volatility in both cases and taking sure shot position on one leg of the trade.

In order to religiously follow this strategic approach to trading binary option, the trader must have a financial calendar at hand that gives him ample information at glance of when the expected news or event is going to occur, what will its impact be, what news or event is about, which asset will it affect, etc. However, bear in mind that such a calendar only gives you insight on news and events that occur regularly, not unexpected events that occur, which very often move markets in entirely unpredictable ways.