Algorithmic and Mechanical Forex Strategies | OneStepRemoved

Binary option example

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Binary options offer traders the opportunity to make a pure play on economics. The most successful binary options traders leverage their overall business instincts regarding world-wide or industry-wide economic conditions in chosen niches.

These traders rely on their judgment about whether a particular underlying currency or other asset class or economic sector will rise or fall in value before a particular expiration date… Then they buy or sell according to the anticipated direction of the market.

If a trader believes that the price of the underlying asset will rise, then he or she buys the subject binary option. Or, if the trader thinks the price will fall, they sell.

An example of a binary option trade

For purposes of the following example of how a binary option trade works, let’s assume that a trader in the Euro-Dollar (EUR/USD) market is watching the market moving above 1.3500 on a particular day.

He or she believes that the EUR/USD pair will continue to rise. So, after researching the available options, the trader buys ten 1.4000 call options at $35 each for a total investment of $350, in the belief that the EUR/USD price will close at or above the strike price of 1.4000 at 4:00 p.m. that afternoon.

binary option

Likewise, if the trader believes that the price of the underlying asset will fall, then he or she could buy a put option as a play on the anticipated downward price movement.

Continuing in the current example, let’s assume that at 3:00 p.m. the trader buys those 1.4000 call options when the underlying EUR/USD price is 1.3900 and therefore the value of the option will increase as it nears the strike price.

At the 4:00 p.m. expiry, let’s assume the EUR/USD price is at 1.4100. So, in this example the trader earns a gross profit of $100 x 10 options = $1000, with a resulting $650 net profit. In the case of a losing trade the loss would have been limited to the cost of the options alone, in this case $350.

Of course, the trader is free to liquidate the option holding at a significant profit before expiry, when the price reaches then rises above its strike price.

How to get started

The last article received a lot of comments from traders sharing their experiences with bad binary brokers. Has anyone had a positive experience?

If you’re looking to get started, my best advice is to start with a very small account. View it as an education so if you have a bad experience, at least you’ve learned something.

Introduction To Binary Options Trading, Part One

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What are binary options, and why are they so popular?

In the world of finance and trading, a binary option, also sometimes called a “digital option,” is a cash-settled, European-style option that can be exercised only on the expiration date. There are only two possible outcomes: The payoff is all or nothing, hence the name.

Unlike the older generation of options whose expirations might lead to unpredictable outcomes upon expiration, the purchaser of a binary option receives a predetermined amount; likewise, an out-of-the-money option expires worthless.

So, those who trade binary options receive a predetermined amount of cash if the option expires “in the money.” For this and other reasons, online binary options trading has become enormously popular.

Binary options have gained acceptance among a wide range of traders. They’re popular with both institutional investors and traders on the exchange floor, as well as independent “prop traders” working online with forex.

Why trade binary options?

Less sensitive to market conditions

The traditional financial markets have been recovering very slowly from the sluggish worldwide economy, yet the newest generation of forex and binary options trading platforms have allowed savvy traders to trade continuously – even while equities and other investments have lagged behind.

For agile independent traders, binary options may lead to more opportunities, often many more than those through spot forex trading alone.

Quick turnaround

The quick turnaround in expiration dates allows traders to bridge multiple markets in real time, so binary options offer a way to be active worldwide markets through 24/7 online trading. Traders can quickly use their account equity by using mobile trading tools to access the marketplace.

binary options

 

Manageable risk — Predetermined profits & losses

Although any form of investment or speculation can be risky, many traders, especially those focused on forex trading, have been attracted to binary options trading because the possible downside to any given trade is completely known beforehand. Unlike commodities or other derivatives in which the holder may be exposed to unlimited risk, the maximum risk with binary options is known in advance.

One major benefit is the trader’s ability to fix the amount of potential loss (and gain) at the start of the trade. The combination of known returns and lowered risk compared to spot forex trading or old-style options trading has led many of those traders to switch to binary options.

Simplicity, accessibility & affordability

Put simply, a binary option trade represents the trader’s belief that the price of the underlying market will rise or fall by the time of expiration of the option. In contrast, the older generation of options requires a clear idea of the magnitude of the anticipated market move as well as its direction.

To trade binary options successfully, a trader needs only to have an idea of the direction of the price of the underlying market over a fixed period of time. Then, buy or sell accordingly.

Accessibility is the key to success for binary options traders – For traders who rely on mobile trading access such as for Android iPhone forex trading and other online platforms, the accessibility of binary options means that business professionals in any niche, even medicine and law and other busy professions, can trade profitably at their own convenience, almost any time of day or night.

Affordability is another reason why binary traders participate in this market. Traders with limited resources who begin trading binaries have reported significant gains, and many small, independent traders are able to economically build their own trading businesses part-time, while continuing in other careers as well.