Binary Options Strategy: Buying a Call

BinaryOptionsNow | Published on April 11, 2011 at 9:38 pm

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Many retail traders have begun using binary options as a trading vehicle to speculate on forex rates, as well as commodity and stock prices and the level of market indexes.

Just about any option trading guide written for regular or “vanilla” options will list a series of option trading strategy types that can usually also be implemented using binary options.

One such option trading strategy that applies equally well to binary options involves purchasing a binary call option. Such an option usually has a fixed payout at expiration instead of the time and price sensitive payout profile seen with vanilla options.

Binary options are also often traded at shorter maturities depending on what choices the binary option brokerage firm used offers. The following sections will cover the purchased binary call option strategy that is among the more common binary option trading strategy types employed by retail traders with access to a binary options broker.

The Long Binary Call Option Trading Strategy

The purchased binary call option trading strategy involves paying a premium in advance to buy a binary call option.

Such purchased binary options will pay out a fixed amount to the holder if the underlying market is above their strike price at expiration.

Binary call options might be available on forex rates, commodity or stock prices or the level of market indexes, depending on the binary options broker employed for the transaction.

Why Traders Might Buy Binary Call Options

A purchased binary call option is a bullish strategy on the level of the underlying market. Accordingly, traders might use this bullish option trading strategy if they thought the underlying market might rise by expiration.

Another reason for purchasing a binary call option is if the trader did not wish to take the added risk of placing a stop loss sell order in the market, especially when the market might be subject to especially volatile trading conditions.

Basically, such stop orders can be subject to slippage where the broker holding the order does not fill it at the requested level and the rate obtained instead “slips” to a worse level than originally anticipated.

Traders might also buy a binary call option if they wish to avoid being triggered on a stop loss sell order on a long position before they are ultimately proved correct on the underlying market’s anticipated upward direction.

Purchased Binary Call Option Example

For example, consider the situation of a forex binary options trader who has the view that the underlying market in EURUSD will likely go up substantially over the upcoming week, with a possible accompanying rise in implied volatility.

A purchased binary call option trading strategy might make sense in this instance. Accordingly, if the current spot rate for EURUSD is 1.4000, this trader might purchase a 1.4000 EUR call/USD put binary option to hold for one week until its expiration.

The premium for the purchased call option would be paid up front. That known cost would then establish the total amount of risk that the trader will take on that particular binary options strategy. This premium could cost less than a stop loss if the trader’s view is incorrect and the market goes sharply lower by expiration that might result in significant order slippage.

Nevertheless, if the market ultimately rises above 1.4000 as expected by expiration, then the purchased call binary option trading strategy will yield its fixed payout to the trader.

Such a scenario results in the maximum profit potential for the purchased call binary options strategy and is constant independent of how far above the strike price the market eventually goes.

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Comments

  • Robert Wells says:

    I would like to know how to read the charts on the binary option platforms to be able to get a signal to know when to enter a trade?

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