Every day more people are drawn to binary options for many reasons with the main one being simplicity. The nature of the binary trade simply means there are only two outcomes possible with the monetary settlement between the trader and the broker for either of the outcomes where it is known in advance.
Average investors have the chance to invest in assets that may have not been an option due to the affordability with binary options. For example, a 100 shares for full lots of Google may cost around $60,000 to buy in, but with binary options you can stake with as little as $10.00 to invest.
You can receive between 60-85% from most brokers for an in-the-money option at expiry. To add to this amount you can count on receiving 15% of the original investment back for out-of-the-money options as well from most brokers. The broker does however have a little advantage if the trader is in-the-money 50% of the time, sometimes less. To put it in simple terms; coming out ahead is not always as easy as it seems. The percentage loss is still greater than the potential win, but with some basic strategies in place this can be reversed and deliver long term results that will provide a profit.
Basic Binary Options Strategies
- Starting out small is one of the most important basic strategies. Binary options can be purchased for as little as $10.00. This results in small risks being taken. Starting out with a demo account can also minimize the initial risk starting out.
- When choosing a broker make sure they are reputable and pays out at the high end for in-the-money options and returns a portion of the initial investment for out-of-the-money options.
- Making your first deposit with a broker that offers a bonus is a great idea when starting out.
- Accurate real time data is important to be successful. Brokers do provide this data, but sometimes it is best to have your own reliable source.
- Always keep track of your option period progression. If by chance you do have the option to close the option early, then you must make sure to follow it to be able to exercise it at the appropriate time. Hedging is another great reason to keep track of your option.
- When starting out always try to concentrate on just one binary option. As you progress with experience and knowledge then you can expand to other types of options.
- Asset classes that you feel comfortable with should be your main focus. For example, if you always wanted to invest in commodities and think now is the right time, it probably isn’t the best idea especially if you haven’t educated yourself from the sidelines.
- Try and concentrate on a single asset or a couple at first. Products that you are familiar with will be a more competent trade that you feel more confident in instead of products that you know nothing about.
The Next Level of Binary Options Strategy
- Keeping informed of the financial news daily is another strategy. Most new trader are not familiar with financial news thus resulting in more losses early on from lack of knowledge of what exactly is going on. Having this trading edge will make you a more successful trader even if the news doesn’t tell you everything that needs to be known.
- Learn how to analyze the financial data. Technical and Fundamental are the two types of analysis.
- Technical analysis is worth the education when it comes to the graphs and symbols used. This analysis touches the investor’s sentiment and emotions.
- Analyzing the asset itself is fundamental analysis. This is the opposite of technical that trends into the economy itself rather than trending on the technical charts.
- Both analysis methods are valued extremely high and can benefit you the more you understand each one and follow them to increase your chances to making bigger profits trading binary options.
Using Binary Options as a Hedge
Lastly, hedging is a strategy that can be followed during the option period where it comes to the point when the asset is almost secure in-the-money. Waiting out the option period to collect the winnings brings satisfaction to many traders. Some traders however do see this as the perfect chance to protect or hedge the investment and profit from the original trade.
If you buy a call option you will want the stock to go up during the option period and if you follow the stock and it goes up with a few minutes left to the expiry you can either wait or you can hedge the option to protect the original option.
This is considered to buy a CALL option at the new price.
Now that you own two distinctive options there are three possible outcomes.
- You will be in-the-money if the price rises after you made the call option, but out-of-the-money for the put. You will lose a small percentage at expiry with the difference between the win on the call and the loss on the put.
- You will be in-the-money on the put and out-of-the-money on the call if the price falls below the original price when you bought the call. The loss will be the same in the example above.
- A successful classic hedge will be created if the price falls from the strike price of the put option, but is still above the strike price of the call option. Thus you are in-the-money with both the call and put with consistent high winnings.
The above hedge example was a way to cover the possibility that the asset would fall with the time left until the expiry. The hedge is automatically a winner if it does indeed fall. You still win on both options even if it falls only a little bit.
To make things a little clearer, hedging is only going to be possible if you follow the option throughout the entire option period.
Conclusion
To have continual success as a binary options trader basic and advanced strategies are the key. It does however take some time to develop the knowledge needed to become an expert with the trades. Starting off with a demo account is highly recommended for all new traders. The last few minutes before expiry is where hedging comes into play giving you great control of the trade.
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