Trading Forex with Binary Options
Binary options are an alternative for the foreign exchange market for traders. It's a relatively expensive way to trade forex compared to leverage spot forex trading offered by more and more brokers, but the fact that maximum potential losses are limited and known in advance is a major advantage of binary options.
Define binary options
The binary option has two results. It is settled on a predetermined value (usually $ 100) or $ 0. The value of this settlement depends on whether the price of the asset underlying the binary option is traded above or below the strike price on maturity basis.
You can use the binary options to guess the results of various situations. Will the S & P 500 rise above a certain level by tomorrow or next week? Is this week's unemployment benefit claim higher than the market expects? Or will the euro or yen depreciate against the US dollar today?
For example, I'm sure gold is currently trading at $ 1,195 per troy ounce and will be trading at over $ 1,200 after that day. Suppose you can buy binary options on gold trading over $ 1,200 by the day's close and this option is trading at $ 57 (bid) / $ 60 (offer). Purchase options for $ 60. As expected, if gold closes above $ 1,200, the sale price will be $ 100. That is, the total fee (before the commission) is $ 40 or 66.7%. On the other hand, if gold closes below $ 1,200, you'll lose $ 60 in investment with 100% loss.
Binary options buyer and seller
For binary option buyers, cost is the price at which the option is traded. For binary option sellers, the cost is 100 and the difference between the option price and 100.
From the buyer's point of view, the price of a binary option can be considered the probability of a successful transaction. Therefore, the higher the binary option price, the more likely the asset price will be higher than the strike price. From the seller's point of view, the probability is 100 minus the option price.
All binary options contracts are made up of collateral, which means that both sides of a particular contract (buyer and seller) must invest capital in terms of the transaction. So, if the contract is traded at 35, the buyer pays $ 35, and the seller pays $ 65 ($ 100- $ 35). This is the maximum risk for buyers and sellers and is $ 100 in all cases.
So, in this case, the risk compensation profile for buyers and sellers can be described as:
the person who lives
Maximum risk = $ 35
Maximum Reward = $ 65 ($ 100- $ 35)
Maximum risk = $ 65
Maximum Reward = $ 35 ($ 100- $ 65)
Foreign exchange market
The binary options of Forex are available on exchanges like Nadex and are available in the most popular pairs like USD-CAD, EUR-USD and USD-JPY as well as other widely traded other currency pairs. These options range from daily to daily and weekly expiration. Nadex's spot forex binary has a tick size of 1 and a tick value of $ 1.
The daily forex binary options provided by Nadex expire hourly and the daily options expire at a specific set time throughout the day. Weekly binary options expire at 3 PM. On Friday.
For foreign exchange contracts, Nadex calculates the maturity value using the midpoint price of the last 25 transactions in the foreign exchange market, removes the top 5 and bottom 5 prices, then takes the arithmetic average of the remaining 15 prices.
Examples of Forex Binary Options
Let me show you how to trade forex using the binary option using the EUR-USD currency pair. Use the weekly option that expires at 3pm. Friday or 4 days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.
Consider the following scenario.
1. The euro is unlikely to be weak until Friday, so I have to keep it above 1.2425. The binary option EUR / USD> 1.2425 is represented as 49.00 / 55.00. Buy 10 contracts totaling $ 550 (excluding commissions). On Friday 3pm, the euro is trading at USD 1.2450. The binary option is settled at 100 and pays $ 1,000. The total fee (before considering the fee) is $ 450 (about 82%). However, if the euro closed below 1.2425, a 100% loss would result in a total investment of $ 550.
2. You believe you are weak on the euro and can fall until Friday (USD 1.2375). The binary option EUR / USD> 1.2375 is represented as 60.00 / 66.00. We will sell this option because it is a weak euro. So the initial cost of selling each binary options contract is $ 40 ($ 100- $ 60). Suppose you sell 10 contracts and get a total of $ 400. Let's say the euro is trading at 1.2400 on Friday 3pm.
The euro loses all $ 400 or 100% of its investment because the exercise exceeded $ 1.2375 on the maturity date. As expected, what if the euro closed below 1.2375? In this case, the contract is settled at $ 100, and for 10 contracts, you receive a total of $ 1,000 of income as $ 600 or 150%.
Additional basic strategies
You don't have to wait until the contract expires to realize the benefits of the binary options contract. For example, suppose the euro is trading at 1.2455 in the spot market by Thursday, but if the US economic data to be released on Friday is very positive, I am concerned about the possibility of a decline in the currency. In this case, the binary binary options contract quoted at 49.00 / 55.00 at the time of purchase (EUR / USD> 1.2425) is currently 75/80. So you can sell 10 option contracts you bought for $ 55 to $ 55 each, and book a total profit of $ 200 (or 36%).
You can also trade combinations for risk reduction / reward. Let's consider the USD / JPY binary option for explanation. The volatility of the Yen traded in dollars at 118.50 could increase significantly, assuming it could trade above 119.75 by Friday, or fall below 117.25. So, you buy 10 binary options contracts (trade at USD / JPY> 119.75, 29.50 / 35.50) and 10 binary options contracts (trade at USD / JPY> 117.25, 66.50 / 72.00). So, pay $ 35.50 to buy USD / JPY> 119.75 contracts and $ 33.50 (i.e. $ 100- $ 66.50) to sell USD / JPY> 117.25 contracts. The total cost is $ 690 ($ 355 + $ 335).
Due to the expiration of the option at 3 PM, three possible scenarios arise. On Friday:
Yen is trading at over 119.75. In this case, the payout for the USD / JPY> 119.75 contract is $ 100, and the USD / JPY> 117.25 contract is worthless. The total payout is $ 1,000 and you get a profit of $ 310 (or about 45%).
Yen is trading at less than 117.25. In this case, the payout for the USD / JPY> 117.25 contract is $ 100, and the USD / JPY> 119.75 contract is worthless. The total payout is $ 1,000 and you get a profit of $ 310 (or about 45%).
The yen is trading between 117.25 and 119.75, in which case both contracts will expire valuelessly and lose the total investment of $ 690.
Binary options are a useful tool as part of a comprehensive forex trading strategy, but even if asset prices soar, the rate of increase is limited and binary options have some drawbacks: finite derivatives (expiration time) with a finite lifespan. ).
However, binary options have a number of advantages that make them particularly useful in a diverse forex world. First of all, even if the price of an asset surges, the risk is limited, and the collateral required is very low and can also be used in flat markets with no volatility. Due to these advantages, Forex binary options are worth considering for experienced currency traders.
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