Opportunities in flat or volatile markets.
You have undoubtedly heard, binary options offer opportunities in all market conditions. And that they do. From up or down trending markets to flat or range bound markets and even to the most volatile or whipsawing markets there is a strategy using binary options.
It is very important though, to understand which strategy to use in each situation and in every event, you should have a well thought out strategy for every market condition.
Before we dive into the basic strategies for binary options, it is important to reiterate that binary options are not a different market, they are simply a different way to express an opinion about the same markets you already love.
Whatever analysis or indicators you are using to signal moves, or lack of moves, in the market now, are the same you would use for binary options. Additionally, as with any type of trading, even before having a sound strategy, you need to employ sensible money management.
That part is perhaps a bit easier with binary options as you always know the maximum risk up front, before the trade is placed. If it doesn’t meet your risk tolerance, don’t take the trade. If it does, then determine what type of market it is and if you are willing to place the trade or now.
So, let’s look at a few different binary options strategies for different market conditions.
Binary options strategy #1 - Flat markets.
A flat market is defined as a market demonstrating very little directional movement. For most types of trading this can be very frustrating as it provides almost no opportunity.
With a binary option, because of the non-linear nature (meaning the price of the binary option can move, even if the underlying market does not) of binary options, this can provide great opportunity.
The key point to remember here, a binary option will always settle at 0 or 100, there are no other outcomes.
In flat markets, traders will tend to buy binary options which are well in-the-money (options trading over a price of 50, often a price of 70 or more) and sell binary options that are well out-of-the-money (options trading under 50, often at a price of 30 or lower) with the goal that time erosion, rather than price movement in the underlying market will push the price of the option toward their ultimate goal of 100 or 0. This is very similar to what is called a premium collection strategy in traditional options.
In this strategy, traders are putting up more capital to make less, and are willing to do so as they believe the probabilities of a positive outcome are in their favor.
Binary options strategy #2 - Volatile markets.
Volatile markets, as one can probably conclude, are the opposite of flat markets. These markets are typified by wild price swings, often of a magnitude several times larger than under normal conditions. Just as a market in this condition is the antithesis of a flat market, so also is the strategy required to trade.
In volatile markets, binary options traders will typically look for a lower risk to higher reward strategy. They are estimating that these large swings can take a deep in-the-money binary option, out-of-the-money quickly, and vice versa.
In this strategy traders may look to sell binary options at a price of 70 or greater and buy binary options at a price of 30 or lower.
With volatility being the key to this strategy, moves can come quickly and just as quickly reverse. Because of this characteristic, experienced traders will often not look for the ultimate payout of 0 or 100, but will utilize limit-orders at various levels to take off a full or partial position and lock in profit, before the market turns against them.
No strategy is perfect and all trades are unique. The above outlines the basics of how strategies for different market conditions can be implemented; however, this is just a first step and it is the responsibility of every trader to fully understand their strategies and follow their trading plan on every trade.
For more detail on these strategies, and many more strategies for binary options, register for an upcoming webinar, or check out our archived webinars covering a wide range of topics and strategies, from basic to advanced.
What to read next:
- What Are Binary Options?
- Types of Binary Options
- Are Binary Options for Me?
- How to Get Started with Binary Options
- Binary Options Trading Strategies