Binary options have grown to be one of the finest alternatives to trade foreign currencies (forex) like a master. With this, you are able to cap the maximum loss and thus are aware of the potential risks in advance that makes it an ultimate platform for traders like me. Before understanding the relation between binary options and currency trading, let’s explore what binary options exactly are.
Binary options can be taken as probable options that have binary outcome, i.e. it tends to reach pre-determined value, which is based on the fact that the price of the currency underlying binary option trading will go below or above a strike price before expiration. Mostly, it is only a work of speculation for different scenarios, for example is the value of Yen or Euro going to decline against US dollar or will Euro be higher than Yen?
Trading Profile: Binary Options on Forex
The major currency pairs that are involved in binary options trading are provided by exchanges such as Nadex that brings EUR/USD, USD/CAD and USD/JPY and many more well known pairs to traders. Every options comes with expiration that can either be weekly, daily or intraday. Nadex has a tick size of 1 whose value is stated to be $1.
One of the common pairs that I’ve been trading so far are intraday that have the expiration period of an hour only. On other hand, I’ve even tried weekly and daily binary option currency trading that expires in 3 pm on Friday and within 24 hours respectively.
The question that I had in my mind is that in such a huge forex market, how can the expiration value be calculated precisely? Well, to my surprise Nadex apparently considers mid-point prices from last 25 orders of the market, eliminating the first five highest and the last five lowest, taking an arithmetic average of the rest 15. Moreover, during 2014 it had proposed to have only 10 price points, which is not yet implemented in the trading market.
There are two popular strategies that have helped me immensely when dealing with the major currency pairs. The first is: In order know whether you are going to have a binary gain or not it is not important to wait for the contract expiration. Let’s say, if by Friday the Euro gets 1.2455 at the spot market, where traders might be worried about its decline in accordance to the US economy data that would unfold the next day. The contact that was quoted 49.00/55.00 during purchase now has is 75/80, hence without giving a second thought sell 10 options of the contact at $75 that you bought in $55 and get an incredible 36% or $200 profit.
The second and perhaps the most easiest strategy is to play the combination game. Take a pair, like USD/JYP and assume volatility of yen that is against 118.50 to USD might increase and get beyond 119.75 or even decline by next week. So, purchase 10 binary option contracts with 29.50/35.50 and even sell with 66.50/72.00, giving you the opportunity to gain 45% profit, when the yen is above 119.75 or below 117.25.
One of my favorite brokers for trading binary options is Omega Options binary broker.