Binary options trading simple steps to success

The Complete Guide to Binary Options Trading

Chapter 1: Introduction

Binary Options

Although a recent innovation in the financial market, binary options are one of the hottest
investments instruments since they made their debut on the Chicago Board of Options
Exchange (CBOE) on July 2008. Previously, Binary options were just traded by large
financial institutions and banks in the over the counter market (OTC). Binary options are
essentially “all or nothing” options that provide an investor a predetermined amount of
payout of an underlying asset when certain criteria are fulfilled.

They were listed on the S&P 500 index but did not cover the currencies, commodities and
equities markets. Nowadays, Binary Options trading has increased exponentially and there
are many Binary options brokers or market makers that will provide a safe platform for both
retail and professional investors to trade in binary options.

The unique thing about binary options is that, an investor will receive a fixed predetermined
payout amount as the return on his investment. The payout of this fixed amount is based on
whether the market price of the underlying asset of the binary option is below or above a
specific moment in time.

Compared to the traditional standard options, the investor of binary option has the choice to
cash out from the market when the price of the underlying asset has increased slightly. When
you are dealing with traditional options, you have to wait until the market price has moved
significantly before you can opt to cash out. It is because of this structure of payout which
Binary Options have over traditional options even though the market price had only moved
slightly that have made binary options an extremely popular vehicle of investment above
other financial instruments in the market.

Most of the time, binary options are based on the current market price and it is possible for a
trader to profit from his investment based solely on the short term fluctuation of the market
price. The structure of the binary option also makes it an easy market to understand. As in
accordance with its name sake, “binary”, it has only two possible outcomes, “in the money”
or “out of the money”. And once an investor has started trading in binary options, they will
be able to realize the benefits and simplicity that trading Binary Options offers.

A typical example trade of binary options is as follows: -

Let’s presume that a trader believes that the GBP/USD currency pair will increase in price
within the next hour. He will then look for a binary broker such as Anyoption or Eztrader for

www.BinaryOptionStrategy.com | The Trader’s Portal 1


the available type of binary options that he wants to invest in. Let’s say he decided to invest
two hundred dollars in a binary option with a 70% payout if the GBP/USD price increased
above the current market price within the hour. This type of Forex Binary options is known
as a “Call” binary option. In our example, the trader will earn $140 plus his initial
investment of $200, giving him a total of $340. And if the market prices move downward
within the hour instead, he will just get back 10%-15% of his initial investment of $200.
Thus, if such a case occurs, he will just get $20-$30. However, in this respect, the actual
percentage of returns will depend on the broker that you are dealing with.

Apart from getting a return within a short term/expiry, investors also have the choice to invest
in binary options that span over a specified period of time. These binary options are known
as “hit” or “miss” options. For these types of binary option, an investor needs to bear in mind
the following:

1) The time frame
2) The price range
3) The broker or market maker who will create the price for the binary option

Let’s say the investor buys a “hit” option for the period right after the release of the US
employment figures. If the GBP/USD increases by 20 pips than the specified price range
within the 5 minutes following the announcement of employment figures, the investor will
get the return for his hit option.

The pricing of binary option are similar to that of traditional options. Normally, a trader in
binary options will have to analyze certain criteria in order to determine if the call or put
option that he purchase is of value or not. Some of these criteria include:

1) The strike price
2) The price of the underlying asset
3) The volatility of the underlying asset

Trading binary options is simpler than dealing with traditional options, as an investor only
needs to take into consideration whether the binary option is above or below his specified
price and time frame. Whereas traders in traditional options need to consider a variety of
issue before he can determine the feasibility of his purported investment. The closest
comparison whereby traditional options can come close to binary option’s payout is when the
investor uses an extremely tight call or put spread. Even then, this structure of trading will
cause complications unless the time period specified is very short.



Chater 2: Terminology Used In The Trading Of Binary Options

As with all financial markets, binary options trading have its own specific terminologies and
jargon, thus, in order for an investor to have a strong base, he must learn to understand the
usage of these specific terminologies. By being aware of these terms, you will be able to
facilitate your understanding of this niche financial market. Some of the common terms used
in the trading of binary options are as listed below:

1. Binary Options:

Foremost, you have to understand what kind of financial instruments that you are
investing in. Binary option also called “digital options” is basically option contracts
that have 2 possible outcomes, hence the use of the term “binary”, up or down.
Nevertheless, binary options are also known by many other names like “all or
nothing” options, “bungee” options, bet options, and digital options. With these types
of options, you get a specific predetermined rate of return when the price of the
underlying asset reaches a specific level. It does not matter how high or low the price
of the underlying asset moves. The specific price threshold which the binary option
must reach is known as the “strike price”. In the event, the price does not reach the
strike price, the investor will suffer less and will get back only a small percentage of
his original investment.

2. Binary Call Option:

With the Call option, you are hoping for the price of the underlying asset to be higher
than the strike price after the specified time frame, that is, upon termination of the
option contract.

3. Binary Put Option:

With the Put option, you are hoping that the price of the underlying asset will reach a
price lower than the strike price upon termination of the option contract.

4. Payout:

This refers to the actual return that an investor will get after a trade.

5. Strike Price:

This is the price at which both the investor and market maker agree that the price of
the underlying asset must breach before the binary option will have a positive payout.



Upon expiration of the option contract, the current market price of the asset will be
compared to the strike price in order to determine whether the trade will be profitable
one or loss making one.

6. Expirations:

This is the time period to which the current value of the asset is taken and compared
to the strike price to determine the return of the initial investment. In other words,
this is the point at which the option contract is terminated between the investor and
market maker.

7. Out of the Money:

This term is used to refer to the circumstances when a binary option contract upon
expiration results in a loss for the investor.

8. In the Money:

This term is used to refer to the circumstances when a binary option contracts upon
expiration results in a gain for the investor.



Chapter 3: Binary Option Pricing Dynamics

Normally, in comparison, binary options that are “out of the money” are much cheaper to
purchase than traditional options. This is because the returns for binary options are fixed
when their contracts reach the expiration date unlike traditional options whose payout
theoretically are unlisted. In addition, traditional options posses a greater “time value” when
compared with binary options.

It is the result of these aspects of valuation between traditional options and binary options
which allows an investor in binary options to

(1) have a quantifiable risk valued investment

(2) stretch his investment capital as his investment outlay is much lower.

Nevertheless, with binary options, when it moves from an “out of the money” to that of being
“in the money”, the valuation profile will change dramatically as compared to traditional
options. This is because any movement that breaches the strike price threshold will result in
a payment of a guaranteed predetermined payout. Conversely, when a binary option moves
from “being in the money” to being “out of the money” position, the value of the binary
option will drop quickly to zero. If we were to depict these scenarios in a graphical format,
the graph will look like a “step” graph.

In comparison with the traditional options, the changes are more subdued. Rather than
looking like a steps graph, it will look more like a curved line. For example, let’s assume the
strike price of a traditional option is $100, when the underlying asset of the traditional option
increases in prices, the option will also slowly increase in value, as it gets nearer the strike
price of $100. The increase in value will also be gradual as the traditional call option moves
from being “in the money” to being “out of the money”.

Price sensitivity of binary options as compared to traditional options

In general, binary options are more sensitive to the price fluctuations of its underlying assets
than that of traditional options.

However, the extent of this sensitivity will also depend on several factors like whether the
price of the underlying asset is:

(1) deep in the money

(2) deep out of the money



(3) near the money

Regardless of whether we are referring to binary or traditional options, their value are less
volatile when the price of their underlying asset is still far below that of the strike price, this
is where the similarity before traditional options and binary options ends when they are both
“out of the money”.

With binary options, as the price of the underlying asset edges towards and breaches the
strike price threshold, its value becomes extremely sensitive to volatility. In short, the value
basically spikes. Traditional options on the other hand are more sensitive to the price of the
underlying asset, when they are out of the money and also when the price moves closer to the
strike price threshold. However, as the value of the underlying asset moves deeper into the
money, both binary and traditional options values become less sensitive to the price of the
underlying asset.



Chapter 4: Using Binary Options

Until the introduction of binary options into the financial market as an alternative investment
vehicle, savvy traders could only profit with substantial upward or downward movements in
price. But when the market is trending sideways and when there is very little momentum
from prices to fluctuate upwards or downward, profiting from the market can be extremely
difficult.

However, with binary options, a relatively new financial investment, traders now have a way
to profit from the financial market even if it is trending sideways. Also as “all or nothing
options”, binary options return to investors a lucrative payout even when the fluctuations in
prices are just minimally above the strike price threshold. Even if the breach in the threshold
price is just one cent above the strike price, the investor will still receive a fixed
predetermined payout averaging around 70% of his initial investment.

Prior to the existence of binary options, for investors to earn a good return on their
investment in the financial market, they needed the market to be trending upward or
downward. However, when the market is relatively stationary, good returns are difficult to
realize. With binary options on the other hand, regardless of how small or how large the
fluctuation in is above the strike price threshold, the returns are the same.

The concept surrounding binary options is relatively simple. Let’s say a trader anticipates
that the price of an underlying asset such as forex, indices, stock or commodities will go up
within a certain time frame. With that analysis in mind, he then purchases a binary call
option. He will achieve a profitable trade if the expiration price is above the strike price
threshold, regardless of how large or small the fluctuation is as the return is fixed and
predetermined.

Historically, only large financial institutions were able to trade binary options. Today, the
market for the financial instruments has started to mature and is available on assets like
commodities, currencies, equities and indices. Trade in binary options is primarily based on
put or call options. This permits the investor to invest in both situations where the price can
be above or below the strike price threshold with a specified time frame for expiration, a
fixed predetermined return and a known cost of investment, investors in binary options are
able to quantify their risks.

Initially, trading in binary options was rather limited and was only available to the “big boys”
like Hedge Funds or large financial institutions. Today, investors have a variety of binary
options with a great variety of different underlying assets to choose from like commodities,



currencies, equities and indices. The liquidity of binary options is exceptional as investors
have access to a 24 hours lucrative market. Regardless of any financial market that we are
dealing with, we have to acquire experience, and spend time to analyze and research the
market and financial instruments that we are interested in investing in to come up with a
Binary options strategy. As the binary options market is relatively new, it represents a unique
opportunity for traders to develop their strategies to capitalize on a market that requires very
little market movement to profit from. Traditional options on the other hand, require that the
price of the underlying asset moves significantly before the investors is able to reap
substantial profits.



Chapter 5: Binary Options Trading Strategies

With binary options, investors are able to reap a quick and large return on their capital outlay.
It is these two main features of binary options that contributed to its ever growing popularity.
As with other financial markets, traders in binary options also have many different strategies
which they can adopt in their trading.

Nevertheless, even though the strategies adopted by different traders vary, the basic
fundamental concept of their strategies remains the same. Below are some of the more
important binary options strategies that traders can adopt for their trading:

The Pairing Strategy:

With the “pairing strategy”, traders will be able to reap a high return from their binary option
contracts. This strategy calls for the pairing of an “in the money” binary call option and
binary put option. As such, upon expiration, the spot price will be between two prices.
Traders are able to reap a positive return because this strategy creates a nested position.

Hedge & Double Position Strategy:

An alternative binary option trading strategy is the Hedge & Double position strategy. This
calls for investor to pair the binary put option with the binary call option into a hedge &
Double position.

Binary Option Betting Strategy:

Another frequently used strategy is in the trading of binary options is the binary option
betting strategy. With this strategy, a trader will purchase a put or call option (depending on
the expected market movements), if there is presumed to be large unexpected movement in
the market. The strategy works on the assumption that investors place their market position
on indicators that actually influences the market in a huge manner due to the self fulfilling
prophecy.

Stop/Loss Strategy:

The most popular of all binary options trading strategies is perhaps the stop/loss trading
strategy. On the surface, this strategy looks simple but in practice, its implementation requires
that the trader have the experience and knowledge to be able to gauge when is the right time
to place the stop/loss position. In addition, a trader needs to consider many other factors like
those listed below before he can actually begin the implementation of this strategy.



 Risk Tolerance

This strategy is dependent upon the risk tolerance of the trader. The higher the
tolerance, the higher the trader will set his stop/loss position. Hence, the personal
preference of the trader plays a huge role in how effective this strategy will be.

 Trading Vehicle

In essence, this is referring to the different market tools that are at the trader’s
disposal in the different financial markets. Each financial market will have its own
stop/loss strategy. For example, in the equity market, a stock trader will be looking at
a constant stop/loss level. On the other hand, for an option trader, he will be more
partial to a two dimensional stop/loss strategy.

 Trading style

Each trader is different in their trading style. We might have a situation where a trader
will be making five to ten trades per day and another who is just making one trade per
day. As such, their trading frequency or style has a bearing on their stop/loss strategy
that they apply. In the former case, the trader will be looking at using a tight stop/loss
strategy. As for the latter, because he is only making just one trade per day, he will
adopt a more flexible stop/loss strategy.

 Market conditions

The conditions of the market also have a huge bearing on how a trader can apply this
strategy. If there is relatively little movement in the market, a trader will need to adopt
a tighter strategy. On the other hand, if the market is rather volatile, he will need to
adopt a more flexible approach in the implementation of his trading strategy.



Chapter 6: Fundamental And Technical Analysis

In addition to the above mentioned trading strategies, a trader can also employ both
fundamental and technical analysis in the formulation of his trading strategies to reap a
lucrative return on his investment.

With technical analysis, a trader will be relying on the market movements or trends isolated
by the use of technical indicators to plot his stop/loss position. By being able to locate the
optimal position, a trader will be able to get an excellent return on his investment. With the
use of fundamental analysis, a trader will be able to enhance his trading strategy. By
analyzing the fundaments of the economy, the trader will be able to gauge the mood of the
market and hence be able to decide whether to trade or not in the market.

Let us assume that it is now10 minutes before the release of the US unemployment figures.
The trader is of the opinion that the figures will cause the S &P 500 index to raise by a few
points but not enough to sustain a long term rally in the market. Hence, the trader will buy a
call binary S&P 500 index option. And if the analysis of the market is as what the trader
predicted and the market moves upward immediately right after the release of the
unemployment figures, upon expiration of the binary option contract, the trader will be able
to cash his contract in collect a large percentage return on his initial capital outlay.

Certainly, there are many strategies that a trader can adopt for his trading strategies;
nevertheless, it is still worthwhile to develop your own strategies in order to enhance your
profitability.



Chapter 7: Choosing A Binary Option Broker

As mentioned earlier, binary options are a relatively new innovation in the financial market.
Regardless of whether you are trading binary options on a part-time basis or a full-time basis,
it is critical that you select the best broker to suit your trading requirement. To help you select
the right binary options brokers, you should bear in mind the following pointers below:

1. Since the majority of brokers nowadays transact their business online, you should
review their trading platform properly. As most of the trading in binary is confined to
put or call options, your binary option trading platform should be able to display
technical charts which will help you track the movement of the currency pair that you
wish to deal in. the trading platform should also offer you a wide varieties of
underlying assets for you to deal with.

Typically, most trading platforms allow for a selection of about fifty underlying assets
to trade in like currency pairs, equities, commodities and indices. Upon deciding on
the asset that you want to trade in, your next step will be to open a trading account
and to deposit your trading funds with one of the binaries broker such as Anyoption.

2. The payout offered by the binary option broker is also important in the selection of
your broker. Typically, you will get between 50% to 81% returns of your investment
outlay. However, it should be noted that a 81% return on your investment is on the
higher end of the payout scale. To learn more about the different broker’s payouts
check our binary options broker’s reviews.

Conversely, when the binary option expires out of the money you can also get some
money back from your original investment. These out of the money percentages
returns average around 10 % to 15%.

3. As the binary option market is a 24 hours market, you also need to ensure that your
broker provides you with 24 hours support. Apart from checking the depth of the
services provided by these brokers, you should also test them out and see what their
response time is like. Although they may have advertised a 24 hours support service.
If their response time is slow, it will defeat the purpose of contacting support if they
cannot respond promptly.

4. Many online brokers, in order to capture more business, offer bonuses on your initial
deposits. And occasionally, they also offer special promotions. You should do some
research in this area in order for you to maximize your investment capital.



Chapter 8: Conclusion

One of the more recent financial instruments to achieve widespread popularity among retail
investors, there are many online brokers that provide an easy access into this lucrative
financial market. Even though binary options seem more complex when compared to other
options, their complexities are minimized to the extent that when the retail investors deal with
them, they can hardly be termed as exotic financial instruments. In fact, the majority of
binary option traders find the workings of binary options easier to comprehend and to deal
with than that of traditional vanilla options.

At their very basic level, binary options reduces option trading to just two simple outcomes,
which is high and low over a predetermined time frame. If the trader is of the opinion that an
asset will appreciate in value over the duration of the option contract, he simply needs to
purchase a call contract. Conversely, if the trader believes that an asset will depreciate in
value, he just has to purchase a put contract. If the binary option contract expires “in the
money”, the trader will get a fixed predetermined payout. If however, it expires “out of the
money, the trader will only lose a fixed predetermined amount ranging from 8% to 100% of
his capital outlay.

Regardless of whether these binary options are termed technically as exotic options, the
trader need only be concerned with just two possible outcomes for the binary option contract,
in the money or out of the money. Apart from knowing this, a trader just needs to have a
proper trading strategy in order to profit from binary options. And the formulation of a good
trading strategy can be assisted with proper tools like a good trading platform, proper analysis
of market trends and focusing on just one or two underlying assets.

Finally, no matter how lucrative a financial market may be, it is also prudent to be
conservative in the trading of binary options. Even the most well designed trading strategy
can have a run of bad luck. Hence, traders must always ensure that they have sufficient
trading capital and should never invest all their trading capital in a single trade. The optimal
level of capital outlay for a single trade should be around 5% of one’s total capital. In this
manner, a trader will have sufficient “staying power” by allowing him to withstand several
run of losses continuously while at the same time allowing him the opportunity to recoup his
trading losses.


Binary options trading simple steps to success

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