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/
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