What Is The Truth About Trends in Binary Options Trading?

Binary Options Trends are made easy by knowing how and where the financial marketplace will lead. Trends are what all binary and forex traders look for and try to decipher.

I gave you a little insight on how Binary Options Made Easy works in my first article, now I will dive a little deeper into the aspects of this exciting trading Platform.

One Hour Options, as they are called, can be viewed as a financial market instrument while traders have a versatile approach without the problems involved while executing regular “vanilla options” as they are referred as.

Whether or not you are looking for a short term projection of your binary options trend or hedging your trades, trending can help you obtain higher payouts in a shorter trading period. This way of forecasting trend movement is achieving recognition with traders worldwide. Forex binary traders are being drawn in by the simple to use binary platform and they can be in and out of a trade in less than 30 minutes.

These All or Nothing Options are available in a wide range of underlying assets such as Indices, Commodities, Currencies (Forex market) and Stocks. No matter if the trader has taken a call (rise in price) or put (a decline in price), the contract has a time period in which the trader has to be correct with regards to the vision in direction of the underlying resource cost, then they will be in the money.

But on the other side of the coin if the trader has picked the underlying asset incorrectly then the trade will stop out of the money. Many binary options companies are starting to use what is called a “roll over”. That is when if you think your binary options trade will finish out of the money you can roll your wager over to the next hour and pay a fee in order to continue the trade.

Being able to easily pick out the trends in Binary Options Trading is what it is all about. Since many times you only have one hour to make your decisions you need to better understand what trending is all about. Since we are making Binary Option trading easy to see the direction in which any commodity can move you need to focus on the short term strategies. Binary Options made easy can give you a better understanding of why the Options markets move as they do.

There is a reason, now all you have to do is learn the principles of good money management, the ease of the binary platform and strict control of your emotions and you are on your way to making some great money. But be forewarned if you are looking to do this full time treat this as a business and not gambling.

How to Trade DITM Options and Buy Stock at Half the Price

Trading DITM options (Deep-in-the-Money) is one of the best swing trading strategies around. By exploiting the high Delta of an option contract, you can effectively trade stocks for only half the risk that you would incur with normal swing trading.  If you can buy the rights to the same amount of stock for half the price, but still make the same profit, you effectively double your return on investment.

This a great strategy for those who are still a bit scared of buying options, but love the challenge of swing trading stocks, and want to gain some leverage on a trade as well as reducing overall risk and cost of investment.  The reason that it can be such a rewarding strategy is that it not only doubles the leverage on a stock trade, but the effect of time decay on the value of the option is minimised.  Swing trades usually have a duration of three to ten days, and if you trade a DITM option for this short period, time decay will not significantly affect the price of the option.

How do you trade DITM Options?

First: Pick your Stock.  You can either use one of your favourite stocks, or you can run a scan for “ready-to-roll” stocks that are perfect for DITM options.  I find that Stockfetcher is the best free resource for finding these stocks, and I have some scans set up for this purpose.

Second: Technical Analysis.  You will need to perform the following steps in order to identify a good swing trade that is suitable for a DITM Option trade:

  • Trend analysis. Establish the trend of both the Market and your stock. Don’t try and buy calls in a falling market!
  • Swing Analysis. Find stocks that have dipped to the bottom of the trend band. These are stocks that are trading between the 10ma and 30ema.
  • Swing Confirmation. Confirm the swing with Candlestick Patterns. Check the RSI and VIX to make sure that a swing reversal is not imminent.

Third: Choose your Option and buy it!

  • Pull up an options table which shows the DELTA of the option. Your broker software should have this feature. Either that or use an Options Calculator, for which you will need to know the volatility of the options. Pick an option that has a DELTA that is at or close to 100.
  • Option Value. Don’t buy overvalued options! You will watch your trade value bleed away. You will need to use software for this – I strongly recommend Volcone Analyser Pro for this (the only bit of this method that is not free!).

Fourth: Set your Stop Loss and Profit Target IMMEDIATELY!

Remember, this is not gambling! Your swing analysis, and confirmed by a look at support and resistance levels, will help you do this.

  • Stop Loss – If you normally set a stop loss of 4% for your stock, then set a stop loss of about 8-10% for your option.
  • Profit Target – set a profit target based on the swing of the underlying stock. Either simply add the dollar value of your anticipated profit to the option price, or use the Option Calculator to work it out. Or use a trailing stop – whatever is your favourite method. Sell the option as soon as you hit your profit target – don’t wait until expiration, otherwise you will lose 100% of your investment! Plan to exit the trade within 10 days or so – if it hasn’t moved by then, the swing analysis dynamics would have changed, and your trade is at risk.

Trading Options – Good Or Evil?

You have probably heard people refer to options as a risky enterprise, akin to gambling. And it is true that options trading can be very risky, especially when engaged in with minimal knowledge and preparation. The average stockbroker or financial planner does not have sufficient options knowledge to guide you in the use of options in your portfolio. But that doesn’t mean options cannot play a role in a conservative portfolio of stocks.

The majority of today’s options trading volume derives from institutional money managers who use options to protect their clients’ stock portfolios. They are using options as insurance. Options may also be used to boost the income that may be derived from a conservative stock portfolio.

Options written on stocks are referred to as equity options and come in two forms: calls and puts. A call option gives the holder of the option the right to buy the underlying stock at the strike price of the option at any time before expiration. A call option is similar to a grocery store coupon for a five pound bag of flour at an attractive price; but the coupon is only good for 30 days and is limited to the purchase of one five pound bag. Similarly, a call option gives you the right to buy 100 shares of stock at a specific price and it is only good for a particular period of time.

Put options are opposite in character to calls and are more like insurance; a put option gives the owner the right to sell the underlying stock at the strike price of the option any time before expiration. Put options are often purchased when one expects a stock to decline in price, or it could be used as a form of insurance if I already own the stock; if my stock declines in price, my put option appreciates and compensates for a portion or all of that loss. An excellent analogy is house insurance; if I pay my insurance premium January 1 and nothing happens to damage my house this year, my insurance expires worthless, just as my put option will expire worthless if my stock just continues to appreciate. But if a hurricane damages my house during the year, my insurance pays for some or all of the repairs. Similarly, if my stock declines in price, my put option will increase in value, replacing some or all of the loss in my portfolio.

Equity options expire on the Saturday following the third Friday of each month. It is common to hear or read that equity options expire on that third Friday. While that isn’t technically correct, it is true that Friday is the last opportunity to trade those options. Saturday expiration was established to give the Options Clearing Corporation and the brokerages time to settle their customers’ accounts before the options technically (legally) lose their value.

Consider the hypothetical company, XYZ, as an example. XYZ closed May 28, 2009 at $34.70; the June $35 call option was quoted at $1.00 at the close. In the options quotations on a site like Yahoo Finance, you will see bid and ask prices posted. The Ask price is the price quoted if I wish to buy the option, while the bid price is what I would have to pay to sell my option. Options are quoted per share of the underlying stock, but are sold as contracts that cover 100 share lots of stock. The XYZ June $35 calls are quoted at an ask price of $1.00. Each contract is priced at $1.00 per share of the underlying stock; since each contract covers 100 shares of stock, the contract costs $100 and five contracts would cost $500. I have the right to exercise my options anytime before they cease trading on Friday, June 19, and buy 500 shares of XYZ stock at $35 per share or $10,500. Or I could simply sell my call options at the bid price anytime before expiration.

Options can be used in several very conservative ways in a stock portfolio. For example, if I own 300 shares of XYZ, but I am concerned this market is softening and may take another dive downward, I could buy three contracts of the June $35 puts at $1.40 to protect my position. This put position would cost me $420 and protect me through June 19. As XYZ drops in price, the puts will increase in price, compensating for some or all of my loss on the stock. This is called a “married put” position. However, there is no free lunch in the market; if XYZ trades sideways or upward, I will lose my $420 of “insurance premium”.

Another conservative use of options is the “covered call” strategy. If we continue with our example of XYZ and I think the stock is going to trade sideways or slightly up over the next few weeks, I could sell three contracts of the June $35 calls for $1.00, bringing $300 into my account. If XYZ is trading unchanged at $34.70 on June 19, the $35 call options will expire worthless, and I will have gained $300 or 2.9%. But if XYZ trades upward of $35, my maximum gain is capped at $330, or 3.7%.

Options trading can be very risky when used in a speculative manner, but options may also be used in conservative fashion with a stock portfolio, both protecting the downside and also increasing the income from the portfolio.