Digital Options Trading Strategy
Successful binary trading and binary options strategies go hand in hand. A trading strategy is a plan on why, when and for how long a trader will take and keep a position. These trading strategies should use derivatives to accomplish initiating risk and are more commonly found in the binary options market. The options market allows a trader to take multiple asset classes to initiate risk for a particular view. The most commonly used binary options strategies are collar, covered call, market conditions, money management, protective put and straddle.Try them out for yourself and choose the best binary options strategy for your needs, also are you not limited to use just one of these strategies, feel free to combine them for even better trading results!
Collar A collar or a risk reversal is when an investor purchases a call and sells a put or vice versa. The main goal of this binary options strategy is to offset the cost of premium for the option that you purchasing by selling another option. If the investor completely offsets the premium from the option purchased, the collar is referred to as a costless collar. A collar is a profitable strategy and benefits the investor in that he does not have to pay out a lot of money on premium and also the risk on implied volatility is greatly reduced.
Covered Call A covered call strategy or a call writing binary options strategy is when an investor or trader sells a call option with a view to enhance his portfolio earnings or to mitigate the portfolios risk profile. It is also defined as a call sold on an instrument that is currently owned by the investor. This binary options strategy is used for three main reasons
(1) the investor will benefit by receiving income from the premium of a sold option
(2) a portfolio will be protected from a market falling, and
(3) to mitigate the downside risk of the market. This option also gives the buyer the right, but not the obligation, to buy the underlying instrument at a specific price on or before a specific date.
Market Conditions The markets can be trending, range-bound or volatile and evaluating the particular market condition can be the difference between a successful trade and a losing trade. A trending market moves in a one direction over a period of time and the trends are classified as secular (for long term time frames), primary (for mid-term periods) and secondary trends (for short-term periods).
If the financial instrument is trending higher, the market is called a bull market trend and if trending lower, a bear market trend. A range bound market on the other hand is when a financial instruments moves up and down in a tight range. The range bound market occurs when supply and demand for a financial instrument is equal. A volatile market occurs when a financial market moves quickly in one direction.
Traders look at the VIX (volatility index) to measure if the market is volatile or is going to be volatile. Bull trending markets have low volatility while bear trending markets have high volatility levels. A trader should examine the type of market a financial instrument is currently experiencing to determine the type of position to take.
Money Management The ability to manage risk appropriately is one of the most important tools of successful trading. Money management is a defensive concept that keeps you trading daily. It uses two concepts trade size and stop placement. A stop placement does not address the question of how much capital should be allocated to a position. This strategy allows traders to form an alternative method to protect their investments.
Protective Put Protective Put allows the investor a full hedging coverage. The investor is protected from a breakeven point down to zero. The buyer has privileges of owning several stock possessions. He can also sell his stock on strike value before its expiration date. In this strategy, the investor is the option buyer.
Straddle This is an investment where the trader purchases both a put and a call at the same strike level, with the hopes that the straddle will make up for the premium invested. Overall, investors who are interested to learn about the binary options strategies find it very easy to trade because they can predict if you are right or wrong, when you will have a bull or a bear market and if you can trade multiple times with the same asset.