Popular Binary Option Trading Strategy Types

Binary options have become increasing popular as a trading vehicle for those interested in speculating on forex rates, commodity prices, stock prices and market indexes.

Although usually traded from the long side, binary options can be combined into several option trading strategy types that are similar to those described in just about any option trading guide that focuses on strategies involving regular or “vanilla” options.

The primary difference seen with binary options is that they have a fixed payout at expiration, rather than the time and price sensitive payout that is characteristic of vanilla options.

Binary options also tend to be traded with considerably shorter maturities than vanilla options, often expiring one week to less than one hour from initiation of the binary option position — depending on what the binary option brokerage used offers.

The following sections will cover some of the more common binary option trading strategy types employed by retail traders with access to a binary options broker.

Purchased Binary Call Option Trading Strategy

This option trading strategy involves paying an up front premium to purchase a binary call option that will pay out a fixed amount if the underlying market is above its strike price at expiration.

Traders might use this bullish option trading strategy if they thought the market might rise by expiration, but they did not wish to take the added risk of stop loss sell order slippage or being triggered on a stop loss sell order before ultimately being proved correct on the market’s anticipated upward direction.

Purchased Binary Put Option Trading Strategy

This option trading strategy involves buying a binary put option for an up front premium that will pay out a predetermined amount if the underlying’s market price is below the option’s strike price at its expiration time.

Traders could employ this bearish option trading strategy if they anticipated that the market could fall by its expiration time, and they wanted to avoid the added risk of stop loss buy order slippage or being triggered on a stop loss buy order before the market eventually moved in the anticipated downward direction.

Purchased Binary Straddle Option Trading Strategy

This option trading strategy involves purchasing both a binary put option and a binary call option at the same strike price that is usually close to at the money in return for an up front premium. These binary options will each pay out a fixed amount if the underlying market is better than their identical strike price at expiration, but they will both not pay out at the same time.

Traders might employ this usually initially neutral option trading strategy if they expected the underlying market to move significantly by expiration, but they were not sure in what direction it might go.

In addition, they might buy a straddle made up of binary options if they did not want to take the extra risk of slippage on stop loss orders or being triggered on stop loss orders after initiating a position in a particularly volatile market.

Purchased Binary Strangle Option Trading Strategy

This option trading strategy involves paying an up front premium to purchase both a binary call option and a binary put option at different strike prices that are usually a similar amount out of the money. Each leg of the strangle will pay out a fixed amount if the underlying market is better than their strike price at expiration, but both legs will not pay out at the same time.

Traders might use this usually initially neutral option trading strategy if they thought the underlying market might move substantially by expiration, but they did not know in which direction.

Furthermore, they might use a strangle consisting of binary options if they did not wish to take the added risk of stop loss order slippage or being triggered on a stop loss order after opening a position in an especially fast market.

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Introduction to Binary Options

Binary options currently represent one of the quickest growing sectors in the finance industry. Although binary options have been available in the professional Currency Option Trading market for well over a decade, part of this growth stems from the fact that commodity, stock and forex binary options have become increasingly available to and popular among retail traders in the last few years.

As a result of this growing retail demand, many binary options broker websites currently offer a quick and readily accessible way of obtaining up to date pricing on a range of stock, commodity and forex binary options in relatively small dealing amounts that are accessible to retail traders.

Furthermore, using these online Option Brokerage facilities to trade binary options can significantly broaden the risk taking methods available to those individuals actively engaged in stock, commodity and currency option trading.

How Binary Options Work

Basically, binary options require a trader to pay an upfront cost or premium for the potential ability to earn a predetermined amount or payout if the binary option ends up in the money when the underlying financial market is observed at the option’s maturity date and time that is commonly known as the option’s expiration.

The phrase “in the money” or ITM simply means that the rate or strike price of the binary option is more favorable than the prevailing market in the option’s underlying instrument at the time of the option’s expiration. 

The alternative phrase is “out of the money” or OTM, and this refers to the situation where the binary option’s strike price is less favorable than the market at expiration.

Similarity to Betting

These relatively simple premium and payout characteristics of Binary Options make them similar to placing a bet on an underlying financial market with a predetermined set of outcomes.

In essence, the premium paid for a binary option represents the amount of the wager or stake that the trader gambled on their bet, while the binary option’s payout represents the winnings to be gained if the trader’s bet is ultimately successful.

This notable similarity of employing a binary option trading strategy to more traditional betting can assist novice option traders who are also gamblers in becoming more comfortable as they endeavor to learn option trading and how to employ derivatives in their trading strategies as a potential form of portfolio diversification.

Basic Components of a Binary Option Trading Strategy

The first decision to make when considering trading binary options is what underlying asset or financial market you wish to place a bet on. These assets might include forex rates, as well as commodity, stock or stock index prices.

The second decision will be to determine the amount of time until expiration of the binary option you wish to purchase.

The last decision will be the forecasted direction of the binary option based on your prediction for the underlying market’s movement during the time frame until the option’s expiration. Basically, if you think the market will rise, you will want to purchase a call, but if you think the market will fall, you will want to purchase a put.