Binary Options Types
Binary options trading has taken the retail market by storm. It is a fairly new concept in this market, and currently one of the fastest growing sectors, especially for investors who don’t really consider themselves financial experts or professionals. It does not necessarily require a huge amount of capital, and is relatively simple as product among the various instruments within the derivatives market. The returns they offer can be very attractive and immediate in percentage terms. However, even though it has become so popular there are still a huge number of investors who do not fully understand how it all works, and is the main reason for developing this ‘site’. Our aim is to inform all potential binary options investors of the most important aspects of these instruments, and to help to guide them through this new and interesting way of trading. Here, we are going to be looking at the various types of binary options, and will cover the more common ones.
The best binary options brokers offer a range of options types, so it’s important to understand the differences and choose the right one to suit your own trading needs. More experienced traders use a number of different methods depending on market conditions, and on how they expect the markets to respond to various external influences, both political and economic as well as trends and other major market based factors.
Introducing a range of the most common types of binary options
- UP/DOWN, CALL/PUT or DIGITAL OPTION
This is the most common type of binary option, and can be referred to by a number of different names. This method involves the trader placing a call if they believe the price will be higher than the entry price at the end of the expiry period. If the trader believes the price will be lower than the entry price, they will place a put. With a binary or digital option, you are predicting whether price will be higher or lower than the active trade rate at the end of the period specified at the outset. This is the perhaps the simplest of binary options to trade, and typically offer a return of 60–75% on the initial investment.
The expiry periods can range from 60 seconds through to the end of the trading day. As soon as a trader has committed to a trade, the trading platform will monitor it and exit the trade at the agreed time. There is no need to be logged into the system, as notification will be sent, (generally by email), to inform the trader of the closing status of the trade.
In choosing this style of instrument, the trader is speculating on the direction of the underlying asset alone. As such, there is less consideration of where and how far the price action develops – unlike a straight forward spot position. When trading the underlying asset, while strict risk management advises a stop loss amount, the upside potential is greater than trading for a binary amount, assuming one gets the direction correct. Binary options, along with all other options, take out the stop loss element, though one has to consider this in line with their track record. Sticking to risk reward ratios will offer better returns if ones performance is 50%/50% or better for example.
- TOUCH OPTION
There are a number of different versions of this particular type of option, including one touch, no touch and double no touch options. These types of option are different to a digital option in that they have predefined rates which (as the name suggests) need to be met or not, during the expiry period. Instead of predicting whether the underlying asset will close above or below a strike price, a trader predicts what level it will reach or whether it will remain inside one or both sides of the limits set. Predicting whether it will reach a certain level is called a touch, and if a trader thinks it won’t reach a certain level it is called a no touch. The predetermined levels are set either side, or both, of the asset’s current price.
Options like this can be purchased at the weekend when the markets are closed, and then the option is traded during the week. A payout is made if the asset touches or holds a specific level or range at any time within the expiry period. This may be as 5.00 pm on Monday for example and in some cases, this can result in a payout of 500%, though this depends purely on the level or levels predefined and how close they are to the asset price at time of trade. If this is a weekly option, the trade ‘continues’ in the same way right up until 5.00 pm on the Friday when the option expires. Each day the price is checked to see whether it has reached or ‘held’ the rate needed to earn the payout.
A No-Touch option pays out if the defined level is not reached, while a Double Touch involves two defined levels, with a payout made if either level is reached.
Options such as these are more popular on a longer term basis, and investors use these types of options when they either see a period of low volatility and hence use No-Touch or Double-No-Touch options. When they see heightened volatility when prices can spike up and down through levels, they can use One-Touch or Double Touch options to take advantage of swift moves in the market.
In these types of scenarios, such binary options can have a clear benefit over trading straight foward Forex, but as such, the price of these structures will be higher and more costly to engage.
- 60 SECOND OPTION
This is becoming a very popular type of binary option. As the name implies, the contract expires in 60 seconds. What is the advantage of this type of short-term option? For example, if the value of an asset is moving in one particular direction a trader can take advantage a number of times, by conducting a succession of trades in what could be a relatively tight range on the day. If a trader believes a price range has been set, but that there is limited scope for movement, he can conduct a series of trades benefiting from various stages and levels within the daily range.
However, this has little difference to a spot trader ‘playing the range’ in the underlying asset. If one believes they are in defined range on the day, or indeed week, they can conduct a series of buys and sells at the limits and achieve similar results. It may also prove less costly as spreads may also be tighter in the underlying asset. The only difference is that waiting for profits may take longer, so these short term options seem to have a limited benefits over vanilla spot trades.
Therefore, this type of option is the same as a digital option, but has a much shorter expiry time and is popular amongst traders who enjoy immediate profits from directional markets, especially within a defined range.
- BOUNDARY OPTIONS
This type of method is also known as a range option, or tunnel option, and is very similar to a no-touch option, in that it involves two predefined levels. There is an upper and a lower level, which comprises the the boundary or range, and a trader is predicting whether the asset will stay within the range in order to receive a payout. Some brokers will allow a payout if the asset breaks out of the boundary during the expiry period and this is depends on whether the option requires to the asset price to be within the range during the whole period or at expiry. These are called American style and European style options respectively.
As covered in the earlier section, these structures are better utilised in a stable market when the trader is predicting a period of low volatility and that the asset will stay within the boundaries set; or in a volatile market when the trader predicts that the asset will break or push outside of the boundaries set.
OTHER TYPES OF BINARY OPTIONS
The structures we have mentioned above are the commonest types of options. There are, however, a number of others that individual brokers have created for their own clients. Take, for example, Banc de Binary, who have developed a method called BinaryMETA. This method allows a trader to sell early on or double their money in the middle of the trade. Banc de Binary clients are given access to a number of different tools that allow them to follow an asset’s history from the time it starts trading. Using a number of different buttons, a trader can click backwards and forwards in time, as well as see their option included on the graph. This useful tool means that a trader can analyse their options and make decisions in real time, just like a professional trader.
To finish up, here are few tips for to consider when deciding on trading binary options. Remember, it may be the case that trading the underlying may be a much better alternative.
Tips when making your first trade
- Understand and manage your risks. The ideal level of risk should be no more than 1% of your equity, with a reward of at least 50% or more of risked capital.
- Know your options. Each offers different returns, so we hope we’ve helped with this decision.
- Select the right expiry time.
These three factors, when combined successfully, will increase a trader’s chances of a more profitable trade – providing of course, they stay disciplined and don’t let greed or emotion take over their trading decisions.
Stay with us here at topratedforexbrokers.com , because we’ve got a whole lot more useful information to guide you in your binary options trading journey.