Trading Advantages with Binary Options

If you have never considered binary options, you need to think again.  These relatively new contracts offer a broad range of advantages that can help the average home-based trader.  Important factors to consider are fixed and variable payout structures, daily expiration times, and trading fees.  However, make sure you are trading with a legitimate regulated exchange, there are many binary brokers who are not. 

The basic concept of a binary option is simple; it is a yes or no proposition. Is the underlying asset price above or below the binary strike price?  This is what determines the expiration value of the binary option contract, either $100 or $0, nothing in between.  So it is an all-or-nothing payout.  That may sound risky to some, but read on …

Advantages Over Standardised Options

Binary options have two distinct advantages over traditional options such as an all-or-nothing payout and shorter expiration times.  The all-or-nothing payout may not seem like an advantage at first glance, but if you consider the fact that the underlying price only needs to exceed the strike price by one tick in order for the contract to payout the full value of 100.  So it does not depend on how far the underlying price will move, it just matters that it will move enough to exceed the strike price, and then time decay will be on your side pushing the contract value toward 100.  Or if you’re short, then the underlying price would need to remain below the strike price, pushing the contract value toward 0.  Whereas in traditional options you would need a substantial move in the underlying asset, in order to keep up with time decay, and produce a profit since traditional options have a variable payout structure.

Another advantage of binaries is this idea of trading expiration day … every day, or every hour.  Since there is virtually no time value remaining upon expiration day, an option contract will move very quickly in response to the underlying price.  So it takes less price movement to create a profitable trade and it’s advantageous to have more trading opportunities in a given day due to the shorter expiration times.

Leverage Your Trading Style

Since binary options have hourly, daily and weekly expiration times, a trader can leverage their own style to produce more opportunities within a given week.  Whether a swing trader or an intra-day trader, binaries may be used effectively to create both short-term and longer-term trades.  The weekly contract is the longest swing trade possible with a binary option.

So by having more trading opportunities and a wider selection of reward:risk setups, one can manage risk more precisely to achieve the desired outcome of a 1:1, 2:1 or 3:1 reward:risk proposition. A trader can potentially realise these opportunities on a daily basis with relatively small moves in the underlying market.

Cut Your Costs and Limit Your Risk

The fees associated with trading binaries according to a major exchange in the US, are roughly 90 cents per side per contract, or a flat $9 fee for an unlimited order.  The unlimited order creates a very cheap transaction fee as opposed to traditional options which range from $1 per contract per side and higher.

While keeping your costs low helps to improve your bottom line, knowing your risk is critical to any trading enterprise.  And since binaries cost far less than $100 per contract, it takes less capital to trade the market that you’re interested in.  In fact, if you are working on a 1:1 reward:risk than contracts will cost an average of $50 or less to trade a popular index like the S&P 500.  Traditional option contracts on the S&P will range from $1,000 to $2,000 each depending on time value and the strike price.

Binaries are certainly worth the consideration of the average home based trader in light of the benefits.  The cost of standardised options to trade major indices is also a significant factor.  But the plethora of expiration times on a daily basis creates numerous trading opportunities with a fixed risk and fixed reward contract.

By Toby Genaro

Regards,
The TWP Team
www.tradewithprecision.com