Binary Options are a new investment instrument for most Americans. If you use them wisely with tested strategies, binary options can increase your forex trading profits immensely.
In forex trading (foreign currencies), there are two main strategies that work using binary options: the long shot and the time vault. Remember that binary options expire at a value of 0 or $100. All or nothing.
The Long Shot Binary Option Strategy
In the long shot strategy, we are buying an option that is far out of the money, in the hopes that the currency pair will move a long distance to cross the purchased strike price, our finish line. We risk a small amount of money with the prospect of a large payout. Our gains will be large, and out losses small. However, this strategy has a low chance of success. The idea is that it only needs to success one in 5 times to see a real profit.
For example:
If the Euro (EUR/USD) is at 1.2815 and we buy a 1.3200 call at a price of $19, there is not a great chance we will win. The Euro needs to gain 400 pips in value for our trade to succeed. However, the gain will be huge: $81 for a $19 investment ($100 for the winning option on expiration). That’s a 426% return on investment. This trade could fail 4 times, as long as the fifth trade is a success. Four $19 losses ($76) will be recovered by just one $81 gain. If you purchases ten of these each time, you’re only risking $190 to gain $810. You could take loses Monday through Thursday, and still recover it all with a profit on Friday alone.
If you can manage a 50% success rate over time, your profits could be huge. Imagine 20 trades in a month, with 10 losing (losing $190 each time), and 10 winners (making $810 each time). You would have gained $8,100 and lost $1,900, netting you a nice monthly profit of $6,200. That’s not bad, and it only requires you to be right half the time.
The Time Vault Binary Option Strategy
In the time vault strategy, we are buying an option that is deep in the money, in the hopes that the currency pair will stay within the purchased strike price zone. In this forex strategy, time works in our favor. We will pay a lot more than we will make in profit, but we have a very high chance of success on most trades. A large percentage of these trades will succeed in profit.
For example:
If the Euro (EUR/USD) is at 1.2815 and we buy 1.2600 call for $89, we will likely win this trade, even though we’ll only gain $11. It only needs to stay above 1.2600 and it’s already 215 pips deep in the money (above the strike price). Even if the Euro falls 200 pips, it will be above the 1.2600 strike price, and we’ll get our full $100 payout. On a round lot of 10 options, we have paid $890 to gain $110. That is still a handsome 12% return on investment. It may seem crazy to risk $890 only to make $110, but look at our odds. They heavily favor a winning trade. The currency pair can move in 3 of the 4 possible directions, and we’ll still win. The currency can go up, stay the same, move down (200 pips or less), and we’ll still win. Only a sharp move, exceeding a 215 pip drop, will result in a losing trade on this binary option.
Playing trades in the middle of these two strategies will rarely succeed. The strategy of buying at the money (currency now at the strike price) for $50 and trying for a profit, will rarely succeed over time. Your gains and losses will be the same size, and you will need to be right most of the time.
In trading forex options, it is better to stick with one of the extreme ends of the forex trading spectrum: far out of the money or deep in the money binary options trades.
For more resources, see NADEX or Fxstreet. These are good sites for forex options and forex spot trading news. Be careful to choose a regulated options broker.
See Also:
The Pros and Cons of Binary Options
