SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Are Binary Options Smart Trades?


Some ideas are simple at first glance but contain risks that might  not be entirely obvious. Binary options are an example. Some traders love them, just as some roulette players are attracted to the appeal of “red or black” as a 50/50 proposition(or close to it, a 47.4% chance of winning due to the ‘0’ and ‘00’ possibilities).

With binary options, you either double your money or lose it all: the roulette table of options trading. Some traders like the simplicity of 100% return versus 100% loss; but it’s not for everyone. Beating the 50-50 consistently is a challenging idea.
 

It might be possible if you believe in technical analysis and use signals to time a trade in binary options. For example, if the underlying price moves above the upper Bollinger Band or below the lower band, retracement is more likely than any other time. An even safer timing move is when the Bollinger default of two standard deviations is changed to three standard deviations. A move outside of the bands is as close to certain to retrace very quickly. If you’re not sure about this, set up the 3-Sigma default and check as many stocks as you want. You will see that price never remains in that status for very long; even two to three days outside of the 3-Sigma is rare.


Most traders know all about swing trading and the timing of buying calls or puts. The shorter the time to expiration, the cheaper the options but the more rapid the time decay. The farther away, the more expensive the option but the more beneficial the timed element. It’s a dilemma of proximity, timing and volatility, all working for (or against) you.


Enter a solution (or a speculative flaw), the binary option.


Without expert timing based on technical signals (like Bollinger Bands, double tops and bottoms, momentum oscillators like RSI, volume spikes, t-line crossover or large price gaps associated with earnings surprises), binary options are pure gambles. This does not mean they don’t have a place in a trading program, at least not for everyone.

aid200303-v4-728px-Understand-Binary-Options-Step-1.jpg


The binary sets up a strike. If the underlying price is above a call’s strike before an identified deadline, you make a 100% profit. If the price is below the put’s strike by that deadline, it is profitable. Otherwise, the binary is a 100% loss.


These tend to be extremely short-term, usually the same day. By the end of the day, the binary call or put will be totally profitable or a total loss. For example, you buy a 50 binary call, hoping the ending price today will be higher than $50 per share. Subtracting trading costs, you stand to earn about $45 on your $50 risk; or to lose the entire balance. If you think the price will be below that 50 strike, buy a binary put.


The many sites offering binary options can be found easily with a Google search. But be wary of the promises made by many. For example, some sites promise you a 50% to 75% return every hour by trading binary options. This could happen (about half the time), but it is unlikely that you can get that level of return consistently.


Many traders believe they have superior ability at chart reading and technical signal interpretation. But it is gambling and consistently calling the right direction – even with an array of convincing signals – is not all that easy. We have all met gamblers who will follow the roulette table and, upon seeing ‘red’ hit five time in a row, will place a bet on ‘black,’ ignoring the facts: Every roll is independent. But they insist it’s a surefire way to get rich. Maybe so, maybe not; but betting on a binary option is a gamble, and the quirks of the moment as the market comes to a daily close often defy even the strongest technical signals.


The rationale that you cannot lose more than the entire amount you bet is appealing to some, but it is still a 100% loss. Perhaps the most sensible use of the binary contract is to use it occasionally when the signals are so convincing that you think your chances are close to 100%. For example, an underlying price moves below the lower band with a 3-Sigma set, and you are certain a retreat is imminent. But you wait until the second day. If price is still below that lower band, you buy a binary call expiring by the end of the day. In this case, you have a better than average chance of profiting, but it is still a form of gambling. But it is based on a technical signal and not just a hunch.


Binary options could have a place in your swing trading program but keep the entire field in view. Be aware of overall market volatility. Time the binary trade and limit your exposure. In other words, be aware that it is a gamble and not a sure thing. You will win sometimes, you will lose sometimes.


The important thing is to use gambling with options very selectively. Be analytical and avoid being a binary thinker.

Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Options Delta And Other Greeks

    The most worthwhile of the "Greeks" for options trading (and specifically for timing of trades) is options delta. This indicator looks at likely change in option value relative to change in the value of the underlying. The higher the delta level, the more likely the premium will move more than movement in the same direction for the underlying.

    By Michael C. Thomsett,

    • 0 comments
    • 160 views
  • Leveraged Anchor Update

    We wanted to provide a quick update on the Anchor strategy tweaks and improvements. We’ve now been tracking the two different leveraged Anchor Portfolios for close to six months – more than enough time to began a review of performance and make some definitive decisions.

    By cwelsh,

    • 0 comments
    • 149 views
  • The Volatility Option Trade in Apple

    We can ride the evergreen patterns, and we have, for years. But when the market shifts, we need a minimum amount of data to adjust, and succeed -- now we will. This is our time with Apple. It's time to take advantage of volatility. Fear, uncertainty, doubt, unclear news headlines. 

    By Ophir Gottlieb,

    • 0 comments
    • 311 views
  • Butterfly Spread Strategy - The Basics

    A butterfly spread is an option strategy combining bull spread and bear spread. Butterfly spreads use four option contracts with the same expiration but three different strike prices. There are few variations of the butterfly spreads, using different combinations of puts and calls. Butterfly spreads can be directional or neutral.

    By Kim,

    • 0 comments
    • 540 views
  • Building A Diversified Equity Portfolio

    In my last article on October 8th, I posed a thought provoking question...Do all stocks have the same expected returns? I discussed how it's generally accepted that fixed income securities and asset classes with longer maturities and lower credit ratings are factors that command a risk premium over time.

    By Jesse,

    • 0 comments
    • 350 views
  • The meaning of divergent bars

    When a daily session moves in the direction opposite the prevailing trend, it is called a “divergent bar.” As a reversal day, it signals a likely change from bullish to bearish, or from bearish to bullish.

    By Michael C. Thomsett,

    • 0 comments
    • 249 views
  • 2 Tweaks to Covered Calls and Naked Calls

    Just about every place I turn someone is spouting the use of covered calls or naked calls. The basic premise is one can pick up "easy money". Unfortunately, I'm aware that there is only so much one person can do to stop this insanity and I've tried in previous articles.

    By Reel Ken,

    • 9 comments
    • 770 views
  • Synthetic Options Explained

    One of the interesting features about options is that there is a relationship between calls, puts, and the underlying stock. And because of that relationship, some option positions are synthetic to others. The prices of put and call options have an identity relationship through the concept of put-call parity.

    By Kim,

    • 0 comments
    • 357 views
  • The Gut Strangle Strategy

    The graphically named “gut strangle” is a seldom-used strategy, but it might work in some circumstances. This involves trading in-the-money calls and puts. A long gut strangle is set up by buying both options; and a short gut strangle calls for selling both sides.

    By Michael C. Thomsett,

    • 27 comments
    • 1,094 views
  • Selling Options When Implied Volatility is High

    In the second week of October 2018, the Dow Industrial Average tumbled 1,300 points within a two-day period just ahead of earnings season. How did it happen? There were several explanations for why stock prices sold off, but the most obvious was that investor fear had changed market sentiment.

    By Nathan Wade,

    • 1 comment
    • 601 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoticons maximum are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs