Binary options were typified call-put based trading commodities, but with time, it derived into multiple subsets. These diversified forms of trading options cater to different traders looking to cut-down risk. This article aspires to examine the multiple forms of binary options trading. Let’s first cover the most common types of the binary options that exist at the moment and then come up with a strategy for using them – a binary options diversification strategy!
Binary Options trading can be segmented into the following kinds:
- Boundary Options
- Short-term expiry Options
- Touch Options
- High-Low Options
- High-Low Binary Options
Call-put options are conventional trading options that are quite simplistic in nature. It’s a simple guesswork, predicting the price of a commodity when at its expiry, to be in below/ above the strike price. Call-put options are the simplest of trading options to work with. More so, their return is 60%-70% more than the initial invested amount. These are quite basic options and we are going to use them strongly in our binary options diversification strategy.
Touch Binary Options
Touch options are classified into two more kinds listed below:
- Touch Options
- No touch Options
There are two cases to each trade, the price increase and the price drop. In case, if the commodity’s price is above its expected price at the time of expiry, the trader opts for touch option. Otherwise, if the trader predicts a decline in commodity’s price, then he opts for No touch option, depending on the trade in question.
These types of binary options usually come with great pay outs, but their probability is lower. We are certainly going to use these options at our diversification strategy, but the amount of such options is going to be minimal.
Example of a Touch Option
For instance, if a trader predicts 1.35 increase in price of a trade when the option expires, he’s to profit 175% from his prediction. Otherwise, he will incur a loss that is equal to the funds invested into an option.
Example of a No Touch Option
For instance, if a trader puts a No Touch option, predicting a decline of the trade’s price by 1.35% at the expiry time, he stands to profit 300% on his invested amount.
In this type, the trader bets with the broker’s expectation of the price prediction of the binary options at the time of expiry.
Boundary Binary Option
In this type of trading, the trader speculates if the trading commodity will close within a visualized range. It is segmented into upper, lower and market in which trader can place his in-out option. In speculates the range within which the commodity will close while out determines if the range exceeds its predicted price.
For instance, the boundary selected is within range of 1.34-1.36 for a particular trade. When the range in option is selected, then it means that trader expects the trade to conclude within that bracket. Upon a correct prediction, the trader cashes in the profit.
The profit in case of boundary option differs for each of the broker.
These types of binary options can be used to build a proper grid in our diversified strategy.
Short-Term Binary Options
These are volatile trading commodities. It’s excessively competitive and highly lucrative, if done right. In this case, the expiry time ranges between the following:
- 30 seconds
- 60 seconds
- 2 minutes
- 15 minutes
The basic principle applies here again, the trader predicts the price ascend/ descend at the end of expiry time. The key difference lies in short expiry time. The trader is all-aware of the risk at hand whilst trading. Risk amounts can differ as per the trader’s vested interests.
Such options expire rather fast and their use is rather limited. We will restrain in using them in the most of our diversified strategies for binary options, however they can be used if we spot that the market is not going in our direction and we want to get at least some payout from our trading.
Binary Options Diversified Strategy Explained
The main idea behind this strategy is to build a certain grid that provides you with minimal loses in case it does not work or supplies your with large payouts once it has worked. To execute this strategy properly, we would need to have quite some substantial trading capital, as we would require purchasing multiple options at the same time.
Step 1: Define the direction
To begin with, you should have a clear overview about the possible move of an asset and the level to which it is expected to move. Usually this move should happen within some 12-48 hours and it is caused by fundamental events. For this level we will get ourselves a touch option with a possible return of 150-300% and it should correspond to 20% of our trading capital.
Step 2: Set a range
This is where a boundary binary options becomes handy. We will use it for the hedging purposes and we will get this option for the range that is close to our predicted direction. Usually this option would come with a rather small return, yet the chances of getting into the range are rather high. We will allocate 30% of our capital for this option.
Step 3: Set the steps
As we have 50% of our trading capital left, we would need to use build 5 steps. Step duration would equal to the following: Current time – Touch Option Expiration Time / 5. In other words. if your touch option expires in 50 hours from now, each of the steps should take 10 hours.
The steps are used reverse your expectancy of the asset move. In other words, if you expect the asset to go up and you got your boundary and touch options above the current market price, the steps should actually expect the price to move down.
Keep in mind that the steps should be placed one by one in order to correspond to the price changes.
Example of the Binary Options Diversification Strategy
Imagine that the current EUR/USD rate is 1.1500 and you expect the asset to go up to 1.1800 in the next 50 hours.
You will get a Touch option for 1.1800 and this is what will get you the most money, if your prediction is right of course.
Then you will bet for the range from 1.1600 to 1.1800, this option would supply you with some profit if your guessed the direction right, but the price didn’t hit 1.1800 level. This profit is used to substitute the loss from a touch option.
Then, it all comes to the steps. The first step you should place considering that your prediction was wrong, hence you would get a put option at the price of 1.1500. If your predicted direction was right, you will lose the funds, but you will be going for higher profit. However, if you predicted direction was wrong, you will make money on the steps.
Now, as you know how to trade binaries by building a grid, it is time to open an account with a licensed broker. We recommend you to try to check out TopOption review and go for this broker. We hope you enjoyed this diversified binary strategy and now are ready for the action!