Once you learn the basics of options trading, you can begin utilizing various strategies in your put and call contracts. This will enable you to turn the odds in your favor and increase your chances of success.
There’s a myriad of binary options strategies in the world of professional trading you can learn and use on a daily basis. These include bullish, bearish, range volatility, fence and many other “game plans”. While some of these are suitable for any type of binary option trading, others are designed for specific options only.
A major benefit of learning binary options strategies is the fact that you can customize them based on your personal preference. For example, depending on your trading style, you can tweak a strategy making it more offensive or defensive. This can be extremely beneficial for investors who want to tailor a trading method to meet their specific needs. Now, without further ado, here’re the most efficient binary options strategies you can rely on in your trades.
Bullish Binary Options Strategies
Bullish strategies are typically used when you expect an asset’s price to rise. Based on how high the stock value goes and the time frame in which the rally occurs, you can choose from several trading strategies based on the bullish model:
- Long call – an aggressive approach which relies on the short-term prospects for a stock. Traders generally use it to capture the upside potential of an asset with limited downside risk.
- Covered call – used mainly by conservative investors, who want to sell calls against a long stock position. With this strategy you can effectively generate income without risks related to uncovered calls.
- Protective put – if you want to protect your stocks from falling prices, protective puts are the way to go. They offer a form of “portfolio insurance” as expert traders would say.
Bearish Binary Options Strategies
Bearish strategies are employed when you predict that an asset’s price will fall. Once you assess how low the stock’s value will go and the period in which the decline will occur, you can select the optimum bearish trading strategy:
- Long put – this approach is perfect for offensive traders who believe that a stock’s price will fall. Long puts offer low risk and high reward as long as your assessments are correct.
- Naked call – a somewhat risky strategy which involves selling calls, which an asset’s value declines. This method should be used with caution since it can lead to significant losses if the stock’s value increases.
- Put back spread – if you expect big falls in volatile stocks, back-spread is one of the best bearish strategies you can utilize. It involves selling puts at higher price and buying greater number of puts at reduced price.
Neutral Binary Options Strategies
Neutral strategies, or Non-directional strategies, can be used when you’re unsure whether an asset’s price will rise or fall. With them, your profit potential doesn’t depend on the stock’s movement on the market. Your success is based entirely on the expected volatility of the underlying asset. Here’re a few examples of neutral strategies:
- Reversal – this method allows you to profit when digital options are underpriced. Reversals involve selling calls and buying equivalent amount of put contracts to offset the price of the underlying asset.
- Conversion – used mainly by floor traders, conversion strategies enable traders to profit from overpriced options. Conversions include buying calls and selling an equivalent amount of puts to offset the long stock.
- Collar – this is an excellent low-risk approach mainly for bullish traders. Collars are created by a mix of covered calls and protective puts.
Other Considerations When Trading Binary Options
Trading During Unpredictable Market Movements
Although technical and fundamental analysis enable you to create precise forecasts of how assets’ values can move, there’re situations when your assessments will be incorrect. In most cases this will be due to unexpected events with strong effect on the market. In order to minimize your risk and still make a profit on your investment, you need to think and act quickly.
Let’s say that you’ve done your research and believe that an unexpected economic event will hit the market at 12 p.m. You’re sure that assets’ prices will be affected but have no idea whether they’ll rise or fall.
In order to protect yourself from both possibilities, you can invest an equal amount in call and put options. Once the unexpected price swing occurs, you can minimize your risk by closing the losing contract before expiry and recovering ¼ of its cost. At the same time, you can keep the winning option and get its full payout. Although this is not a miracle strategy it can be extremely useful for making secure trades with small profit in unpredictable market conditions.
Money management is a key factor in binary options trading. Without it, you risk losing everything you’ve gained in just a few bad trades. To help you increase your trading profits and minimize potential loses, we’ve prepared several simple and easy tips you can use anytime you trade digital options:
- Never risk more than 8.5% of your deposit – trade smart and don’t bet everything you have on a single contract. For example if you have $1,000, you shouldn’t risk more than $85 on a trade. This strategy will keep you safe even when you lose several consecutive times.
- Be confident – trade only when you’re confident in your assessments. If you haven’t researched and analyzed a contract thoroughly, don’t rush and trade with it.
- Diversify your trades – make sure to choose options on different assets and expiration times to diversify your trades. This practice will also broaden your knowledge and experience in binary options.
- Keep an eye for financial announcements – consider trading after important economic announcements to minimize risks related to losing due to unpredictable market movements.
- Follow trends – watch out for developing trends as they may have an effect on related markets.
- Expect loses – accept loses as part of your trading endeavors. Don’t forget that losing is just a natural part of binary options trading.
Using the right strategy when trading binary options can significantly boost your chances to be in the money. Study the markets, predict their movements and select a suitable approach to „exploit” their weak-spots. Keep in mind that there’s no perfect strategy in digital options trading. Every approach has its pros and cons. Rather than looking for the ideal mathematical model, be flexible in you trading efforts. When the unexpected happens adjust your strategy to ensure maximum profit and minimal loss.