Selling Binary Options – GBPUSD Example

Selling Binary Options – GBPUSD Example

Selling binary options may seem strange to new traders. After all, how do you sell something you do not own? Yet in the financial markets it’s done all the time and traders should be comfortable with both buying and selling instruments. When selling an instrument, traders sell with anticipation of buying it back at a lower price in the near future. The profit is calculated by subtracting the buyback price from the trader’s original sell price. Of course, if price increases, instead of decreasing, then a loss is incurred. Here is an example using the GBPUSD on Friday, May 12th.

Selling Binary Options – GBPUSD Example
Selling Binary Options – GBPUSD Example Getty Images

Selling Binary Options – GBPUSD Example

On Friday, the GBPUSD price had moved up but could not break the previous resistance at 1.2890.   This area was tested numerous times and price simply could not move above this area.  An Out of the Money short (which means to sell) could be entered at 1.2876 (about ten pips from where price was currently trading).  The risk on the trade would be $29.25 (maximum payout, $100, minus the premium shown in red, $70.75). In other words, the trader could not lose more than $29.25 on the trade if price moved against the position.

Selling Binary Options – GBPUSD Example

Remember, the trader sells at a high price and then buys it back at a lower price.  Since binary options have a maximum payout of $100, the trader is selling at $70.75 in anticipation of buying it back when it goes lower.

In this example, price does move lower as the chart below shows.  The trader now has the choice to buy it back at $10 or allow it to expire.  If the trader buys it back (red arrow highlights the strike that was entered), the price is $10.  Using the price the trader sold at ($70.75) minus the buyback price ($10), the resulting profit is $60.75.

Selling Binary Options – GBPUSD Example

To learn more about selling binary options, join this Wednesday’s webinar at 11am New York time and Gail Mercer will show you how to sell binary option contracts and then manage them from start to finish.

Note: Exchange fees not included in calculations.

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