Binary Options Strategy: Selling a Call

BinaryOptionsNow | Published on April 13, 2011 at 5:29 pm

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In recent years, binary options have become quite popular among those speculating on movements in forex rates, commodity and stock prices, and the level of market indexes.

Many traders prefer using binary options that have considerably shorter maturities than vanilla style options. Some binary options brokerage firms even offer binary options that expire one week to under an hour from initiation of the binary options position.

Furthermore, binary options can be combined into several option trading strategy types similar to those detailed in virtually any option trading guide dealing with trading strategies involving “vanilla” or regular options.

The sections below cover the sold binary call option trading strategy that traders can employ if their binary option broker permits naked option selling.

The Sold Binary Call Option Trading Strategy

The sold or short binary call option trading strategy involves receiving an up front premium to sell a binary call option that will pay out a fixed amount if the underlying market is above its strike price at expiration.

If traders use this neutral to bearish option trading strategy, they will stand to make a profit that is limited by the premium received if their market view is correct.

On the other hand, if their view is incorrect and the market has risen over the option’s strike price by expiration, then they will be required to hand over the binary call option’s payout to its holder.

Why Traders Might Sell Binary Call Options

A sold binary call option is a neutral to bearish strategy on the level of the underlying market. Accordingly, traders might use this sold binary call option trading strategy if they thought the underlying market might stagnate or fall by expiration, and market volatility might decline.

Another reason for selling a binary call option is if the trader did not wish to take the added risk of placing a stop loss buy order in the market on a short position that might be subject to order slippage.

Still other traders might combine a short term sold binary call option with a longer term long position in the underlying as a covered call writing strategy. Although equivalent to a sold binary put option, this strategy can enhance returns achieved on longer term long positions when the market is consolidating recent gains.

Sold Binary Call Option Example

For example, consider the case of a forex binary options trader who thinks that the underlying market in EURUSD will likely fall or stay pretty much the same over the upcoming week, with a possible accompanying decline in implied volatility.

A sold 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 sell a 1.4000 EUR call/USD put binary option that expires in one week’s time.

The premium for the sold binary call option would be received up front. That known and limited profit would then be established, as would the total amount of risk that the trader will take on that particular binary options strategy, which would be its payout.

If the market then ends up below 1.4000 at expiration, the EUR call/USD put expires unexercised and the trader captures the entire premium received. On the other hand, if the market ends up above 1.4000 at expiration, the binary EUR call/USD put is exercised by the holder, thereby requiring the trader to send its fixed payout to them.

Furthermore, for additional security against being having a short option position exercised by its holder, a trader might instead prefer to sell an out of the money binary EUR call/USD put option struck at 1.3800. Although the premium received would be lower, this way, the market would have to rise above 1.3800 to trigger the binary call option’s payout.

 

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