Why I’m so Excited About the Money-Making Potential of Binary Options
Why I’m so Excited About the Money-Making Potential of Binary OptionsFollowing last week’s issue, I’ve been delving deeper into Binary Options…
I must admit, I’d always been a bit turned-off at the mention of ‘options’. The exotic names of complicated strategies would spring to mind…
Strangles, Straddles, Condor Spreads… Reverse Iron Butterflies!
I remember swotting up on them a few years ago. But that was all to do with traditional options…
Binary options are a bit different. And I’m glad to say – a lot simpler to understand. I thought I’d share a bit of my research with you today.
If you’ve never come across Binary Options before, this may give you the opportunity to come at the markets from a refreshingly new angle. And if you’re already a seasoned veteran, excuse me covering the basics here, but I’d love to hear about your experiences trading them.
So what are Binary options exactly?
It’s basically a process of placing a bet based on your opinion of a specific market event taking place in the future.
You’re not buying or selling the actual underlying asset like you would be if you bought, say, a mini contract of GBPUSD through a normal Forex broker…
With this way of trading, you might assess the price of GBPUSD will be higher in sixty minutes time, or you might bet on it not touching a certain price within the next five minutes, or you might even call a specific price range you think the market will be trading within as the next hourly bar draws to a close.
And the beauty of it is there are only two possible outcomes…
“Yes! You were right – GBPUSD IS trading higher sixty minutes later (and it doesn’t matter if it’s just by a single pip), here’s your winnings.”
Or…
“No, you were wrong, GBPUSD is actually trading lower after sixty minutes. The broker keeps the money you staked on this bet.”
And that’s where ‘Binary’ (meaning composed of two things) comes from. You can only win or lose. There are no graduations of success or loss.
And this is one of the big attractions in using Binary Options…
Your risk is limited and 100% defined in advance
So whereas in leveraged markets (like standard forex trading) a mistake or wild market conditions can have a worse than expected effect on your account…
With the Binaries, you know exactly how much you can lose in advance. It doesn’t matter if World War Three breaks out within the next five minutes, or a wonky economic report sends the market into a frenzy, you can only lose the money you first laid down to place the bet.
So let’s have a look now at the standard trade-types most of the Binary brokers are offering:
1. Higher than / Lower than: this is your basic option written with target rates based on the current market price. You can bet the market will close higher than the current market price or you can bet it will close lower. I’ve seen various expiry (close-out) times ranging from a day or more, right the way down to thirty seconds, with payouts around 70% of your initial stake.
i.e. a winning trade with £10 initial investment returns £17 – your original £10 back plus £7 (70%) profit.
2. Touch / No Touch: I see potential for powerful strategy development using these option types. If you think the market will touch a specified price with a given time period – say EURUSD to touch 1.3790 within the next hour – place a Touch trade. If you think it won’t touch 1.3790 within the next hour, place a No Touch.
How exciting to think your use of support and resistance levels can be revolutionised with these tools… if you spot a nearby overhead resistance level in the market, simply select a ‘No Touch’ trade with a specified price (strike price) above the resistance level and let it repel the market’s probings, keeping your trade safely out of harm’s way until it expires in-the-money.
3. In Range / Out of Range: These options have both an upper and lower target prices that creates a band (range) you expect the market to either be contained within, or sat beyond, as the option expires.
How are Binary Options offered to you?
Each option returns a fixed percentage of the initial investment. It’s usually around 70% but changes subtly according to the broker’s opinion of the market. Remember, he’ll be trying to take an edge by pricing things in his favour… it’s our job to neuralise his edge and take one of our own by applying superior analysis!
There will be a list of pre-configured options within the trading platform the broker has priced up ready for you to consider. You just need to identify the ones with a high probability of success, and pull the trigger!
You’ll also notice options trades have a bit of their own lingo attached…
“In the Money” means the option has expired in the traders favour. If he bet on the market closing at a higher price, it has now done so and he gets paid out on his winning trade.
“Out of the Money” means the option expired against the trader. If he bet on the market closing at a higher price, it has actually closed lower and he forfeits the investment amount he staked on this trade.
“At the Money” means the market closed at exactly the same price the option opened at. In this situation the initial investment is returned in full to the trader.
You can trade four major pairs with most Binary brokers – EURUSD, GBPUSD, AUDUSD & CADUSD – and if you like to diversify a bit, you can also look at Gold, Stocks & Stock indices and commodities from within the same platform.
There are no shortage of Brokers offering their services, some more reliable than others. I’m testing a strategy with a couple of different providers at the minute so I’ll do a little review of Binary Brokers for you in a future issue.
In the meantime, here’s a little summary of Binary Options in general…
Advantages of Binary Options:
- It’s fixed-risk. You know exactly how much you can lose before venturing into a trade.
- You only need to be ‘right’ by a single pip and you get paid out in full. You don’t need the market to make big moves before you profit handsomely.
- You can keep pumping out multiple winning trades once you’ve identified a sweet-spot in the market to exploit.
- There are no spreads or commissions to pay
- Depending on how you structure your trading enterprise, your Binary profits can be completely tax-free
- You’ll know exactly when your trade will end. You don’t need to monitor it or adjust it
There are a couple of things you need to be aware of too…
- It’s fixed risk, but it’s also fixed return. You can’t adjust the parameters of your trade to take advantage of a strong breakout in your favour.
- You’re limited to the options the brokers have pre-bundled for you.
- You need to choose your weapon carefully. Don’t go gambling on whether the next 30 second print will be higher or lower for a meager 60% return. I saw those options offered today – they’re targeting the inexperienced adrenaline junkie, and taking those trades is almost certainly a sure way to the poor house.
Forget the crazy, risky stuff. Here’s the kind of thing that’s got my profit glands quivering…
A: Pre-determined resistance level
B: No Touch option strike price (above resistance)
C: Keep… taking… multiple… sell… binary… option… trades… off… that… level
More ideas on how to profit with binary options to follow…
Kato Recommends
Yes, You Really Can Make Good Money With This Evening-Based Forex Strategy
Last week I sent you my personal endorsement for Jason Alexander’s evening-based Forex trading strategy – Ad Break Trader.
If you missed it, I gave Jason’s strategy a big thumbs up, not least because it allows you to exploit lower volume market conditions with ‘set and forget’ trades that run automatically overnight.
As you know, I rarely recommend other strategies but this really is something special. Take a look at this website for full details.
Be Prepared: Market Moving Data Coming This Week (London Time – BST)
Wednesday October 30th 2013
08:00 EUR Spanish GDP (EUR)
12:15 US Nonfarm employment change (USD)
12:30 US Core CPI (USD)
18:00 US FOMC Statement (USD)
18:00 US Interest Rate Decision (USD)
Thursday 31st October 2013
07:00 EUR German Consumer Climate (EUR)
07:00 UK Nationwide HPI (GBP)
12:30 US Continuing Jobless Claims (USD)
13:00 US Treasury Sec. Lew Speaks (USD)
13:45 US Chicago PMI (USD)
Friday 1st November 2013
09:28 UK Manufacturing PMI (USD)
14:00 US ISM (USD)
I hope you enjoyed this week’s issue. I really would love to hear from you if you have any experience with Binary Options. Just hit reply to this email and let me know your thoughts.
