Binary Options: Strategies For Directional And Volatility Trading

Trading Binary Options offers traders and sophisticated investors a way to trade directionally around specific events, say an earnings release, an expected shift in currencies, or a release of economic data (say, unemployment data and its impact on the market). There are six fundamental elements of binary options:


(1) They have a fixed risk and fixed reward. This means your maximum risk and reward are always known and capped. If you hold a binary option until expiration you will either get $0 and lose your entire investment or get $100 per contract. Unlike vanilla put call options there is nothing in between. Although you may always trade in and out of binary options contracts.


(2) Binary options have no puts or calls; they simply have price conditions for the underlying.


(3) Binary options are fully collateralized so that you can never lose more than you put into a trade. With binary options you can implement directional and volatility trades and spreads without any debit balance or margin call risk.


(4) Low collateral requirement. With binary options you can get into long and short trades with minimal collateral thus you can customize your trading strategies without having to put up large margin requirements.


(5) Unique behavior as expiration approaches. Since binary options can only be priced at $0 or $100 at expiration, their premiums behave completely different from traditional put/call options as expiration approaches.


(6) Expiration times. Traditional Put/Call options usually have monthly and weekly expirations. Binary options have Weekly, Daily and Intraday expiration times which provide for different trading opportunities.


Understanding these instruments is essential to trading them well, and trading them well allows savvy market players to react quickly to event-driven opportunities and trends.

Alex Nekritin is CEO and President of TradersChoiceFX, TradersChoiceOptions, and TCForex, one of the largest introductory brokers in the world. Mr. Nekritin has been trading in equities, options, futures, and Forex very successfully for more than a decade. He holds a degree in finance with a concentration in derivative instruments from Babson College in Wellesley, Massachusetts. Alex's work has been featured online at FXStreet.com and TradingMarkets.com.