Start trading Forex ( FX) binary digital options
When an investor would like to place a forex binary option trading he would take under consideration the following factors:
- Trade time
- Spot price
- Strike price
- Forex (FX) binary option price valuation time
- Expiration time
Comparison of binary options premium pricing among binary options firms
It’s highly recommendable that the binary options trader will choose the firm he’s working with according to several parameters, one of them is the option premium collected by the binary options brokerage. Usually there are great variation in the premiums paid as this investment product is relatively new and not liquid as more mature investment products such as CFD’s and Spread Betting.
The difference between: In the Money, At the Money, and Out of the Money
While placing an option trading, the main focus of the forex trader is on the current price of the underlying asset, in our case the real-time spot price.
The spot price that also can be referred as the currency price is called at the money strike price.
The forex trader can purchase a binary option; the strike price will be one of the following:
In The Money (ITM)
As you already know, anything in the online trading reward is based on a gauge of risk and reward.
The trader has to choice a variety of strategies and risk and reward factors in order to match the best options strategy that will match his investment style and the risk level he’s willing to take.
Risk haters usually stick to in-the-money option positions while risk lovers are more attracted to out-of-the-money option positions. In case the trader purchased in-the-money option, the option will move in correlation with the underlying asset price (in our example the forex spot price). The main advantage of trading forex options in contrast to taking a fx spot position is that investor will pay only the premimum without any other risk, on the other hand the premium of in-the-money option is much higher
At The Money (ATM)
Describe when the options strike price is equal to the spot price, This will allow the investor to take a position which is really close to the market real price without paying the high premiums of In the money position.
Out the Money (OTM)
Trading out of the money options is extremely popular, the forex investor speculates on a scenario which is far from the real market price. The investor wishes for a sharp move that will cause his position will advance according to his prediction, to his strike price or hopefully will exceed his strike price and will become an in the money position.
Option Value vs. Time factor
By taking a forex option trade, the investor always see in his mind several dimensions that related to his predicted profitability and risk. The most important factors are:
1)The time factor-how much time is lest the option to expire
2)Volatility-which implicate the risk within the option position
The option is prices according to many factors which are reflected in the premium price.
The idea behind pricing options is so find cases in which an underlying asset is underpriced or overpriced because of factors that aren’t related to the market and can be used by the investor to take advantage to use this price arbitrage to make money as the market correlation is not systematic.
Hedging breakouts of the USDCHF and AUDUSD by using forex binary options
In my previous posts I outlined and gave examples of how to use binary options trading as a vehicle to hedge Forex trading. The links to these previous posts can be found below, and they are very useful if you still find this technique confusing, or if you just want to delve deeper into the theory. But just as a reminder, one of the many ways that binary options trading can be useful is as a hedging vehicle. Rather than use a traditional stop-loss to protect against loss, I have been using binary options. The reason that binary options can be more attractive than stop-losses, is that stop-losses are risky below the breakout point, assuming that’s where you are placing them, and generate losses when they are hit.
On the other hand, using a binary option hedge, which is simply a binary option position placed to win in the opposite direction of our Forex trade, we gain better protection than with stop-loss because if our Forex trade fails than our binary options wins, thus fully hedging our Forex position and ultimately leading to zero losses if our Forex trade fails. Thus the risk is shifted from below the breakout point, in the area between the breakout point and the stop-loss, to above the breakout point, in the area between the breakout point and the cost of the binary option. Again, have a look at my previous posts if this is still confusing.
Today I used binary option hedging to protect against breakout failure of the USDCHF and AUDUSD. As you can see in the image below, these instruments were in full swing today. As usual, within the hour after breakout both instruments tested their breakout points. While placing a traditional stop-loss may succeed if placed exactly right, it is nearly impossible to guess how far below a breakout point a test may descend, often shaking us out of our position before breaking out again shortly afterwards. This is where a binary option hedge is useful. Immediately after placing my Forex trades at the breakout points, I placed $100 binary option hedges (a trade of a binary option in the opposite direction of my Forex trade) on TradeSmarter.com’s binary option trading site. As a result, I was completely covered up to $70 of losses when the breakouts were tested. Had the breakouts truly failed I would have exited with zero losses thanks to the binary option wins, rather than losing money had I used traditional stop-losses. Since the breakouts succeeded after testing the breakout points, I became profitable as soon as I made more than $85 on my Forex positions ($85 is the amount lost when the binary option fails).
The strength of this hedging strategy relies on the properties of trader momentum. Since nearly all traders use stop-losses below the breakout points, a test of the breakout point is very risky below the breakout point when more and more stops get hit and selling momentum builds. The same is true after the breakout test, when the breakout occurs again. At this point most traders are aware that the breakout did not fail and re-enter with greater momentum. This helps us quickly recoop the $85 loss of the binary option. You can see this in the image provided, as well as in my previous posts using the GBPUSD.
In conclusion, by using binary option hedging we shift the risk from below the breakout to above. This allows us to take advantage of trader momentum which works against us when using a stop-loss and works for us when using binary option hedging.
For more information on how this works see
http://tradesmarter.com/2009/06/hedging-a-breakout-of-the-gbpusd-using-binary-options-trading/
and
http://tradesmarter.com/2009/06/trading-binary-options-as-a-hedging-strategy-for-forex-trading/
Go to trade options
Hedging a Breakout of the GBP/USD Using Binary Options Trading
Today as expected, the GBPUSD ended its fantastic five day up swing (see image below, left side). The end of the swing was marked by a reversal during European market hours, shortly after 8AM GMT. The reversal was marked by a breakout at the 1.65150 resistance line. As usual the breakout was tested less than an hour later. At that point, the GBPUSD rose just above the breakout point, reaching 1.65185. This slight failure of the breakout point was enough to shake out those of us Forex traders that place a tight stop-loss just below (above in this case of a short) the breakout point.
We all know how much it stings when a very minor breakout failure denies us a huge payday. Indeed, those of you who placed a wider stop-loss raked in huge profits all the way down to 1.63555. So the question that always returns to our mind is, ‘What to do- set tight stops and get shaken out or set wide stops with greater risks?’
In my last article I explained how to resolve this risk conflict using binary options hedging (the link is provided below). Today would have been a great opportunity to use this strategy. At the same time that I shorted the GBPUSD at 1.65150, I placed a CALL binary option trade on the GBPUSD. Since the payout model at tradesmarter’s binary option trading website returns a 70% payout, this meant that my $100 CALL binary option effectively hedged my GBPUSD short trade and kept me profitable even when the breakout failed. In fact, I was hedged all the way up to 1.65250 without placing any stop-losses. As expected, the breakout failed only slightly and then brokeout again with much more momentum. My hedge cost me $85 because the success of the breakout caused my CALL binary option to fail. However it did its job since the profit on the GBPUSD was much greater, as you can see in the chart attached.
The conclusion, as you can see, is that binary option hedging can usually offer us a more successful alternative than placing traditional stop-losses. Thanks to moderate breakout tests, followed by trader momentum, we can shift our risk from below (in this case above, because its a short) the breakout point to above it (in this case below it). For a quick explanation of how this works see see http://tradesmarter.com/2009/06/trading-binary-options-as-a-hedging-strategy-for-forex-trading/ .
Binary betting is a relatively new concept to both traders and investors
As Binary options are the latest craze to hit financial markets. I’d like to recommend this website that has pretty much objective information written by a Anna Coulling: It’s a great resource and has a lot of information for both new and experienced traders that want to get themselves into binary betting - which explained by Anna: “Binary betting is a relatively new concept to both traders and investors, and has really only been available for the financial markets in the last 2-3 years. It is gaining in popularity for reasons which I hope will become clear shortly. For those of you familiar with fixed odds betting, and also spread betting, binary betting provides a bridge between the two worlds. In a sense it a composite of the two trading strategies, offering the advantages of the flexibility of one, combined with the defined risk profile of the other.
If you would like to understand a little more about Binary betting, then please follow the link below , which explains this trading strategy in detail. ” If you want to read more of that post click below:
http://www.binary-betting-trading.com/binary-betting-general.htm
