In order to learn how to trade binary options, one needs to become adept with the terms used in binary options trading and the type of binary options. First , let’s try to understand some terms common with binary options trading.
In binary options trading, there are four major markets for trading. These markets in no special order include
a) Commodity market: where the prices of international relevant commodities such as oil, gold etc. are wagered upon.
b) Currency market: where the fluctuations in the exchange rates of two currencies are wagered upon e.g. USD/GBP or USD/JPY
c) Stock market: where the fluctuations in the stock market values of companies are wagered upon
d) Indices market: where the fluctuations in the values of combined companies’ stocks are wagered.
The popular market is the commodity and currency market.
In binary options there are some terms one must get acquainted with. These terms include;
e) Strike price: This is the current market value of a commodity or share or currency depending on the market, at the time of trading.
f) Call: This is what you indicate when you think that the price of the commodity will be higher than the strike price at the time of expiry.
g) Put: This is what you indicate when you think that the price of the commodity will be lower than the strike price at the time of expiry.
h) In the money: The trader’s predictions were right at the time of expiry and as such he/she is entitled to a percentage of the investment on the trade.
i) Out of Money: The trader’s predictions were wrong at the time of expiry and as such investment made on that trade is lost.
Types of Binary Options trades
Binary options originally started out with the plain CALL/PUT options but over time the growth of the trade resulted in the development of other forms of Binary options. The wide choice offered caters to different types of trader profiles and risk sentiment. Understanding the different types of binary options is essential for a trader before they blindly start trading one of the many types of options that are available. In this article, we explain the different kinds of option expires in an effort to educate the reader about the same.
Binary options can be broadly classified into the following types:
• High/Low Options (the traditional CALL/PUT Options)
• Touch Options (also known as One Touch Options)
• Boundary Options
• Short Term Expiry Options
So let us briefly go through each type
1. High/Low Binary Options
The traditional CALL/PUT option, trading High Low option is as simple as speculating if the price of an instrument will close above the price at which the contract was entered or if the price will close lower than the strike price. CALL/PUT options are one of the easiest of binary options to trade. They typically offer a return of 60 – 85% of the invested amount and there is a wide choice of expiry date and times to choose from.
For example, the above shows the strike/market price is $1.29358. If from analysis a trader thinks that the price at time of expiry will be higher than the strike price he/ she indicates a call. If he/she thinks the price at expiry will be below the strike price, then a put is indicated. If the predictions of the trader are correct then a percentage (which in this case is 85% of $200) of the investment for the trade is awarded to the trader. However, if the predictions are wrong then the investment is lost.
2. The Short Term option:
This is the same as high/low options except that short term option unlike high/low expires very fast. It is possible to quickly lose all of your investment as it is very addictive. Short term options come with a 30sec, 60sec, 2minutes and 15minutes expiry times. With short term options a trader speculates if price of the instrument will closer higher or lower than the market price at the time the contract expires.
3. Touch Binary Options
Touch options are further categorized into the following two types:
In this type of Touch option, a trader speculates if the instrument will touch a specified price by the time the option expires. In the touch binary options trade there are two options available. The options could either be a Touch or a NO- Touch option. Choosing a touch option, a trader thinks that the instrument will touch the specified price by the time the deal expires. Likewise, a No-Touch option is selected when a trader believes that the instrument will not touch the specified or target price before expiry.
The above trading chart indicates that the Touch Option trading was selected by the trader. The trader expects GBP/USD to touch 1.57152 by the time the option expires. If the target price is not achieved, the trader loses their invested amount (Out of the Money) and if it does, they stand to gain 67% (In the Money). The percentage gain varies from one broking firm to the other.
High Yield Touch:
A high yield touch option is somewhat similar to the touch option but differs a bit in that a trader speculates if the market price will touch the broker’s target price before the expiry time.
The picture above shows an example of a GBP/USD High Yield Option. The trader placed a No touch option, meaning that GBP/USD is not expected to hit 1.68619 by 12:45 the option expiry time. If the trade is successful, the high yield touch option gives a whopping 300% return on investment while still keeping the investment risk capped to the amount invested.
4. Boundary Binary Options
With this type of option a trader can speculate if the price of the instrument will close within a range or within the boundary. The boundary option has three prices. Upper, Market and Lower and traders can place an IN or an OUT option. IN option specifies that the instrument will close within the upper range of the instrument and an OUT option specifies that the instrument will close in the lower range of the boundary.
The above picture shows a Boundary option with an expiry time of 11:30. So when a trader selects an IN option, they expect GBP/USD to close within the boundary of 1.60493 and 1.60458. If an OUT option is selected, then the trader would expect GBP/USD to close within 1.60458 and 1.60422.If the option fails to achieve its objective, the option is deemed to expire out of the money. The returns available for Boundary option varies from one broker to another Short Term Binary Options
The different types of binary options offer different returns but the risk is always capped to the amount you wish to invest. There are many ways the above types of options can be traded depending on a trader’s risk profile and most importantly their trading strategy.
Commodities that can be traded in binary options include: Gold, Currency, Oil, Equities e.t.c.
What is the best time to trade binary options?
One of the most important aspects when trading binary options is to know when to trade the market. Even though trading on foreign exchange options, stock options, commodity options and index options is available 24 -hours a day, 5 days a week, not every hour or minute is worth trading. There are different hours during the day and different days of the week which see more volume and liquidity than others, resulting in high volatility and opportunities to maximize trading.
When more than one market is active, you can expect to see increased price fluctuations(volatility), meaning that prices move around more and in a clearer direction-this is basically described as peak hours. During of-peak hours, there is little volume and less price movement, resulting in at and directionless markets.
As a binary options trader, you profit when you correctly predict the direction of an asset price.
Volatility is therefore essential to maximize the chances of you increasing your return on investment. In
contrast, markets will be less active and liquid during major holidays in the US and Europe, resulting in