Binary options have become more appealing for investors in today’s volatile market. The main appeal? Binary options are simple to understand and to use effectively. The term “binary” shows that the nature of the trade is basic. There are only two possible outcomes, and both are completely clear to the investor and the broker before the trade is even made.
With binary options, traders have a chance to invest in assets that may have previously been out of reach. You may not be able to access the tens of thousands of dollars for a full lot share of Google, but through binary options, you can profit from predicting Google’s future with as little up front as $10.
Binary options brokers traditionally pay out up to 85 per cent for a binary option that expires in the money. Many also offer a pay out of around 15 per cent of the original investment for an option that closes out of the money. Generally speaking, the advantage still likes with the broker if the trader is only getting it right about half the time, and it is true that the potential for loss is still higher than the potential for gain. However, by using a basic trading strategy, traders can realize strong profits and a successful long-term outcome.
The Basic Strategy for Binary Options
Start small. Start out by trying your hand at a demo account, where there is no risk. Then, many brokers make binary options trades available for as little as $10, which keeps your risk very low as you start out exploring the world of binary options.
Work with a known and reputable broker. Check that your broker pays out well for options that end in the money, and that also returns some of your original investment for options that end out of the money. This will help you offset any beginning losses.
Look for a broker that offers a bonus for a sizeable initial deposit.
Make sure you have a separate source for real-time financial data. Most brokers offer a live stream of financial data, but it’s a great idea to have another source so you are not solely relying on your broker to determine whether or not your option has been successful. Instances of incorrect data reporting at time of expiry are very rare, but they do happen.
Keep track of your options. There may be times when it would be wise to close your option ahead of your set expiry time, and many brokers allow for this. In order to take full advantage of this, you need to follow the progress of your option as it progresses.
You may also want to keep track of your option to take advantage of another trading strategy, known as hedging. We will explain this strategy in further detail in the next section.
Start out by trading in one binary option. As you begin to understand how your type of binary option works and you become more experience, then you can expand into trading in some of the other varieties of options available.
Focus on using the underlying assets that you know best. If you have been following the foreign currency markets for some time, this may be a good asset class to start working with. If you have never followed the commodities markets at all, this is not the asset class you should start out with.
Focus on a single asset or two to begin. If you are familiar with your underlying asset, because you use the product or you have followed the company in the media, you will feel more comfortable trading in that asset. Don’t start trading in an asset you are completely unfamiliar with.
More Advanced Binary Option Strategy
Study the financial headlines daily. Many beginners have not spend a great deal of time keeping up on global markets and financial news, so they can end up losing money right away due to a lack of understanding of the forces at play. You will not gain the information you need to be a successful trader from one day’s headlines, but over time you will start to see patterns that could give you an edge when it comes to trading.
Learn the differences in how data can be analyzed. Data analysis involves a lot of charts and symbols that may look impenetrable, but after you understand how to read it, if offers excellent guidance.
Technical analysis looks at investor mood and emotion and how that affects global markets.
Fundamental analysis examines economic trends and the assets themselves, as opposed to investor reaction.
Both technical and fundamental data analysis are excellent tools. The more you understand and the closer you follow the trends, the better your chances for large profits.
Hedging with Binary Options
Finally, let’s take a look at how to use binary options as a hedge. If you are closely monitoring your option during the option period, there may come a time where you see that your asset is almost certainly going to close in the money. Many traders are happy to just wait it out and collect their profits, but others see this moment as a chance to hedge their investment and make even more money.
For example: You have bought a call option on a particular stock because you believe the stock’s price will go up during your option period. You are following your option closely, and you see that the stock is indeed up, and you still have a few minutes left before your option is set to expire. Now, you can either wait, or you can choose to hedge your option. The idea of hedging is to protect your original option.
If you chose to hedge, you will now buy a put option at the new price on your stock. You now own two distinct binary options on the same stock. There are now three possible outcomes.
If the price still rises after you have purchased the put option, you will be in the money on your call option and out of the money on your put option. At the time of expiry, you will lose a small percentage, which is made up of the difference between the profit on the call and the loss on the put.
If the price drops below your original strike price on the call option, you are now in the money on the put and out of the money on the call. Your loss is the same as mentioned above.
If the price falls from the strike price on your put option, but is still above the strike price of your call option, then you have made a successful hedge. You are in the money on both your original call option and your later put option, and you profit from both investments.
The reason you decided to hedge in the first place in this scenario was to cover your losses in case the stock price fell in the time still left in the call option. If that was the case, and the price did fall, the hedge helped you cover your losses. If it fell by only a bit, the hedge offered you the chance to increase your profits.
It is worthwhile to remind investors that hedging only works if you are closely monitoring the progress of your option all the way up to its expiry time.
Summary
Binary options are becoming increasingly popular as investment tools, and there are lots of strategies to help you succeed as a trader. It does take time to develop your knowledge base and your skills, so start out with a demo account and then add in small trades using assets and asset classes that you are familiar with. You will grow as an investor from there, and keep in mind that hedging can be a successful trader strategy.
