Binary Options Basic Trading Strategies
Binary Options Basic Trading Strategies
March 7, 2012If you want to be a successful trader you must have an effective trading strategy!
What is a Trading Strategy?
Basically it is a plan on why, when and for how long you plan on taking and keeping a position. Similar tactics and methodologies can be used to when investing online and risking money on binary options. The trading strategies I will discuss below empower the trader to do two very important things:
1. Take multiple asset classes in order to initiate a calculated level of risk for specific analysis and trade. Here are some of the most commonly used binary options strategies:
- Collar
- Money Management
- Straddle
- Protective Put
- Covered Call
- Market Conditions
2. Try out these strategies and see which one is best for you. Furthermore, we encourage you to combine strategies. Eventually you will see that your results will be much better!
Collar: A collar, (also referred to as “risk reversal”) is a way for you to offset the premium costs for options bought by selling other options in your possession. A “costless collar” is when you have completely covered the costs of the premiums by selling other options in your possession. Basically it doesn’t take a genius to understand that this is a way for traders to minimize risk especially with market volatility levels are considered high.
Money Management: Your ability to manage risk factors is probably the most important element of successful binary options trading, or for that matter any kind of trading. In money management we uses two defensive-style concepts designed to keep you engaged and trading. These are called hard stops and position size. We strongly urge traders to read up on these two concepts because they will help you keep your trading portfolio in check.
The Straddle strategy is an options trading strategy where the investor holds a position in both a call and put. In this scenario in both cases he holds on to the same strike price and expiration date.
Covered Call A covered call strategy is when you decide to sell a call option with a view to improve positions and the earnings portfolio in an attempt to minimize the portfolios risk indicators. It is also referred to as “a call sold on an instrument” (that is currently owned by the investor). This binary options strategy is used mainly for the following reasons:
I. There will be an additional layer of protection added to the investment portfolio
II. The risk will be mitigated. Furthermore, the option at hand provides the buyer with an exit strategy which is the right, to purchase the underlying asset at a specific price on or before a specific date. This is particularly important when choosing the expiry times and dates on binary options trading.
III. The investor will benefit directly by receiving income based on profit derived from the premium of an option that was sold.
Market Conditions
Your ability to read market trends are a part of your trader instincts and your ability to evaluate assets, commodities, indices, or stock options are crucial to your success. Market volatility levels constantly change and your ability to keep a finger on the pulse of the assets or options in your stock portfolio is invaluable. Your evaluation of a specific market, trend, coupled with a critical and educated view of analysis and information will be deciding factors in your ability to get returns on your investment.
Trends in general are classified into secular, primary and secondary. The first is mostly used by traders looking for a long term investment. If you are looking for blue chip stocks like IBM or Gillette you need to be looking at secular trends because these guys have been around for a while and it’s interesting to correlate market trends with peaks and dips.
Primary trends are for stock traders interested in medium-range market trends. Meaning is you want to see what type of influence the recent oil crisis had on GMC you may want to start reading up on the issue going back 3-6 months. Finally Secondary trends are for traders looking to see market influence on the immediate level. Meaning what’s happening now in the markets and how are the graphs performing on the indexes 1-4 weeks back.
If the markets are trending in a more intense level, this is commonly referred to as a “bull market” . A “bearish” is a market where trading volumes are lower and market conditions may indicate (for example) a recession, tax increase, or higher unemployment levels.
Range-bound markets are when the peaks and dips stay mainly in the same quadrants. Meaning they move up and down, but the range is tight. This happens when supply and demand for a specific asset or commodity is the same. Market volatility is when a financial market moves either up or down very fast.
Experienced traders look to the volatility index to get a better understanding of what direction the market is going. Bullish markets tend to have lower volatility levels, while Bearish markets can suddenly take a big dip or peak significantly. The S&P500 is one place we look to get a feel for the markets. However since we are talking about a global economy we also like looking at the SSE and Hang Seng Indexes to understand market fluctuations.
Protective Put : This is a commonly used hedging strategy. If you own several stock options you can sell other stock you have before the expiration date. At worst you come out even, but you don’t actually lose, although a lot of my colleagues will say that if you don’t make money you lose money – so there is only so much maneuvering you can pull off here.
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