High/Low Binary Options
This type of binary trade is the most common option used by traders and looks to gain from the direction of the market. A buyer of a call option believes the price of the underlying asset will push up and above a strike price set at the outset. Conversely, purchasing a put option is in the belief that the asset price will push lower and below the strike price. These are European style options where the price is required to be above or below the strike at expiry.
The alternative would be to buy or sell the underlying asset, and where the binary high/low option sets out the amount of risk and reward at the outset, a straight forward spot buy or sell can achieve the same risk limit by using a stop loss. The reward however is unlimited, as the price can go higher or lower beyond traders expectations.
What to do if you want to trade a high/low option
If you do decide to try and trade direction through high/low options, the following steps apply:
Decide on the asset you want to trade – naturally.
Decide on the strike price, as this will be the level you believe or expect price to ‘close’ above or below at the end of expiry.
A call is purchased if you believe the price will end up above the strike price at expiry and a put if it you think it will be below the strike price.
Decide when the option will expire – what time you believe your direction or move will be achieved in.
Placing the trade is simple enough, but as well as getting the direction right, the timing is also an added consideration. Some brokers may limit your choice of timing by only offering a minimum expiry of 7 days or 1 week. Naturally, it is more difficult to ascertain what will happen to the price over this length of time. You may also have a view on the market or price on a shorter or longer time frame. A choice of expiry periods is preferable.
How you can be successful with high/low options
Just as you would have to keep in touch with the latest news and data when holding positions in the underlying assets, so the same would seem to apply with binary options. However, with a European style option, once the trade is placed, payout will only be achieved at the end of expiry if the direction and timing is successful. In this instance, a traders ‘hands are effectively tied and there is little he or she can do over a rigid expiry period. If the broker platform allows expiration dates of between 3 hours and 3 days, then traders have more reason to react as the option will be more dynamic – a shorter expiry period is more dynamic. The effect of news on prices is at its strongest during this shorter periods. In these instance, when data and news are plentiful, it may be more beneficial to trade the underlying using stop losses – one can benefit from the volatility also.
So can strategy be used with high/low options? Yes, as it is based on you directional view. Technical analysis is can be applied, as it is a strategy that is dependent on price action. Charting and pattern recognition can be an excellent tool. Just as you would in standard trading positions, you would need to pay attention to any bullish reversal candlesticks, or bullish patterns for example. There are a number of binary options brokers who offer downloads of trading platforms that include Forex, crude oil, spot metals, and index futures. They should preferably be offered on the same platform, and provide analysis through charts and related indicators. This will all add to the likelihood of trades being more successful as it would in all cases.
As in any form of speculation, traders can feel comfortable in choosing to trade through high/low binary options. Much like in any other financial market or asset, guesswork is not the best way to approach trading. Yes, it can work at times, but you will be far more successful in the longer term with a good strategy in place – one that helps you get an idea of where an asset is heading, but with binary options, you will also have to determine whether the asset will end up on a high or on a low beyond your predefined strike price.
The benefits of trading high/low options
There are a number of benefits to trading high/low options when compared to trading regular Forex or stock markets. The main advantage here is that there is no need for either a stop loss or a take profit target. All a trader needs to focus on, once price and payout and loss has been determined, is the expiry date of the option. As soon as a trade is active, it cannot be changed or adjusted. This can be a positive thing as traders not be tempted to change their strategy or extend their stop losses. If you are a disciplined however, the flipside of this is that the binary option will give you a set amount if you are correct. When trading spot, the underlying asset, if you stick to a rigid stop loss, then the rewards can far outstrip the risk (amount of stop losses in money terms), perhaps as much as 3 or 4 to 1.
High/low options can be applied to all market conditions. They can be traded in markets that are trending or moving sideways in a range. There is no need for the price to be trending strongly in one direction. All that is required is for the price to be a fraction higher or lower in order to provide a return. High/low options are perhaps more popular when there is strong trend or increased volatility. A higher level of risk, can be balanced out by higher payouts. If you believe the market will move strongly in one direction, binary options can be a very profitable based on the level of your strike price.
Trading binary options has become a very popular form of investment for a number of different types of trader. The fact that they are so simple has made them very popular for beginners also, and has attracted many new investors. But as with any form of investment, the risk of losing your money is ever-present, so it is wise to set out your strategy and what you hope to achieve with your trade, and whether binary options or standard ‘spot’ trading is better served to help.