Out-of-the Money (OTM) Binary Options provide the opportunity to trade with very little capital risked for a much higher return. If these trades are successful, it is possible to reap a twofold, threefold or greater return on your investment. If they are not successful, you had very little money at risk to begin with.
With binary options, you are making a trade based on your opinion about where the price of an asset will settle, relative to a fixed strike price, within a defined period of time. When you make the decision to trade an OTM binary option, you are expecting the market to move significantly to an area on the charts significantly above the current price of the market if you are a buyer, or significantly below the current price of the market if you are a seller. Unless you are trading into a major, high impact news event, you will need some time on your side for the market to move.
To trade OTM binary options, you also need a strategy that can help you identify OTM setups. Here is one method to identify an OTM trading opportunity:
- Look for confirmation of a bounce off a major support or resistance level.
- Look at the price ladder and identify an OTM strike price that offers $25 maximum risk or less.
- Draw a trend line from the strike price at expiration to the reversal. Does the market look like it can reverse all the way up to your strike price?
Let’s take a look at an example of this:
In the 15-minute chart above, the US 500 market had dropped sharply, but bounced off a key support level. A trend line was drawn from the 2079.8 strike price back down to the market which was trading at 2073 at 11:30am. The trend line from the strike price was steep, but the market was staying inside the trend line as it traveled back upward.
Two contracts were bought at >2079.8 with a maximum risk of $15.00 per contract, for a maximum reward of $85.00 per contract. The market continued to climb, and as it did, the value of the contract continued to climb. At 12:26pm, the market broke through the 2079.8 strike price, yielding a $48.50 profit per contract. The decision was made to exit the trade early and take profit for a threefold return on capital risked.
Drawing a trend line from the OTM strike price to the market gives you a gauge of how the trade is playing out. If the market had reversed and broken significantly through the trend line, it might have been a signal to exit the trade to take a partial profit or to minimize losses.