Trading Direction with Binary Options

Trading Direction with Binary Options

Submitted by adil on Fri, 08/01/2014 - 19:30

Which Direction Will You Go?

There are no better tools to trade the market direction than binary options regardless of its upward and downward movement. Whether you are trading as a seller or a buyer, you will never get more than the amount you paid for the binaries. The cost for the buyer is the trade price of the binary options, whereas, the cost to the seller is the difference between the contract value (i.e. 100 dollars) and the price.

The binary options contract always closes at the zero value or the 100 value at the time of expiry, but only one binary party earns the potential profits. Because there is a cap of 100 dollars assigned to binary options, it has become easier to quantify and match the risk, returns and ROI choices made by the traders at different exercise prices and durations of the binary options that are primarily based on the underlying market.

Being a trader, you should know that time is the crucial factor in binary options trading. When you are trading with binary options, your market call on the direction should be correct, but there is a room for upward or downward movement in binaries.

For example, suppose it is Tuesday and the trader, who is currently bullish on EUR/USD, waits for the next day’s news release to confirm the position. The current price of spot currency is 1.3593 and you predict the market to move between 1.3650 and 1.3660. The time frame is expected to be between one to two days to predict the trade target that needs to be achieved. In the regulated US exchanges, binary options contracts are usually listed for the period of one week, one day or a few hours. Based on the time period in this example, binary options with a day or week can be selected, but we will go with the weekly binaries.

Following is the list of binaries with the weekly exercise prices and the expiry of these options is 1500 EST on Friday. However, the weekly contracts are listed for trade at 1800 EST on Sunday:

• The Weekly EUR/USD with the strike price of 1.3675, costs 19. The net payout is 81 and the profit percentage is 426 percent. The pip will be -82. Hence, the trade is unfavorable.
• The Weekly EUR/USD with the strike price of 1.3625, costs 38. The net payout is 62 and the profit percentage is 163 percent. The pip will be -32. Hence, the trade is unfavorable.
• The Weekly EUR/USD with the strike price of 1.3575, costs 61.50. The net payout is 38.50 and the profit percentage is 63 percent. The pip will be +18. Hence, this trade is favorable.
• The Weekly EUR/USD with the strike price of 1.3525, costs 81.50. The net payout is 18.50 and the profit percentage is 22.7 percent. The pip is +68. Hence, this trade is also favorable.

In the above example, it is assumed that the buyer receives the settlement profits, the offer price is the cost and exchange fee is ignored. The full value of 100 dollars was not achieved until the time of expiry, so the trade position would increase in value but it will not be 100. You can choose to retrieve the payouts now or keep it till the expiry of the contract.

On the other hand, the strike price of 1.3675 is greater than your target price. However, if the price of the underlying asset moves in the upward direction toward the strike price, your trade position increases in value at delta of 100.

With the number of choices available to traders, trading the direction with binary options depends on the risk and reward profile of the trader and his comfort level related to the underlying.