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Understand the underlying asset in which you are purchasing an option. Be familiar with where it trades and anything else likely to influence it. If it’s a stock then will the company be making a financial announcement soon? If it’s an index then look at any political factors which may have a bearing on the country’s currency.
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Realize that the higher the rate of return of a binary option, the more risk there is involved. The risk must be weighed up against the reward before taking a position on an option.
Here are several industry strategies for binary options trading. Each investor should choose the one which suits him best.
The Reversal Strategy involves waiting for the market to make a sudden move in one direction on the assumption that it will not remain at the extreme value permanently. An investor should then buy the option at the extreme value, in the hope that the asset will reverse back closer to its original position, so the investor can benefit from the asset’s change in direction.
Another strategy is to closely monitor commodities which will have a knock-on effect from each other. For example, changes in stocks will have an effect on the index in which the stock trades. Or a large change in the price of a commodity may affect the price of its country’s currency. It’s useful to monitor changes in one underlying asset and then to purchase an option on the ‘secondary’ asset which it affects.
The Straddle is a common strategy used by investors. This involves purchasing a Call Option when an asset’s price is low. As the asset’s price increases, purchase a Put Option. If the expiry level settles in between these two strike prices then both of an investor’s options will be in-the-money. This strategy necessitates close monitoring of the asset to gauge when it appears to be peaking in both directions.
For example, a $200 Call option is bought on EUR/USD, strike price of 1.46155 with an end of the day expiry. If the asset is monitored throughout the day and its price is increasing but looks like it will peak, then a Put option can be bought at say a strike price of 1.6895 for $200 with an end of the day expiry.
If the EUR/USD expires in between 1.46155 and 1.6895 then the investor has succeeded twice. If the return rate was 70% on both options then he could make $680. There are different alternatives on this strategy. The first option bought may have an end of the week expiry.
The asset can then be monitored and a second option bought on the last day of the week, with an end of the day expiry, so that the two expires coincide. This gives the investor more time to review the asset’s movements and hence the possibilities.
