On occasion, traders have strong reason to believe that an event is likely to occur that will have a massive impact on the value of a specific asset. For example, when central banks raise or lower interest rates or intervene in the financial markets, traders usually know to expect especially volatile market conditions.
When there is reason to believe that an upcoming economic event is likely to have a powerful effect on the value of a particular asset, one way to increase your trading profits may consist of employing a binary options strategy I will refer to as “stacking.”
Binary Options Strategy: Stacking
When I refer to the binary options strategy of stacking, what I mean is executing several binary options trades on the same underlying asset at the same time with evenly spaced out expiry times. In this way, you can take advantage of an asset’s continuing rise or fall in value with several successful options as opposed to only one.
When coupled with other forms of investment in the same asset, for example simultaneously trading forex and stacking forex binary options, this strategy can be extraordinarily profitable. The most important element remains, as always, being as certain as possible that you are selecting the correct market direction. If you select incorrectly, this strategy can lead to heavy losses.
In order to elucidate the strategy of stacking binary options, let’s examine an event that massively impacted the USD/JPY exchange rate. On Thursday, August 4th, the Bank of Japan sold some of its currency reserves in its third intervention in the currency markets in less than a year in order to devalue the Yen which had reach as high as round 76 Yen to the US dollar.
Few, if any, traders had any way of knowing exactly when or if the Bank of Japan would intervene in the global forex market in order to drive down the Yen’s value. However, even if one did not know when or if this unilateral action would occur, one could still have capitalizes on the effects of the intervention by employing the stacking strategy after the devaluation efforts began.
Below, one will find the 15-minute USD/JPYchart during the time at which the massive volatility was experienced.
Click on image to expand
As you can see, if at approximately 2:00 A.M GMT – when the USD/JPY rate was 78.31 – you had evenly invested $1000 in the following 4 binary options trades on USD/JPY options that pay out 80%, you could have benefited from enormous trading profits.
- $250 call on USD/JPY option with 2:30 A.M GMT expiry (78.76). Result: $200 profit
- $250 call on USD/JPY option with 3:00 A.M GMT expiry (78.97). Result: $200 profit
- $250 call on USD/JPY option with 3:30 A.M GMT expiry (78.98). Result: $200 profit
- $250 call on USD/JPY option with 4:00 A.M GMT expiry (79.03). Result: $200 profit
This strategy takes advantage of the fact that the forex binary options use the execution time (the time you invest) as the basis for determining if the options finish in-the-money or not. Since the event, in this case the Bank of Japan intervening in the currency markets, is likely to push the USD/JPY’s value to a new level – in other words, well above the rate at which you purchased the binary options – your options will continually expire-in-the-money until that level is reached if they were purchased at around the time the asset started rising/falling in value.
In the example above, I selected the investment amount of $250 at random. However, if you would have increased your investment amount to $1,000 or $2,000 for each trade, for example, you would have finished the series with a $3,200 or $6,400 profit.
Moreover, if you had felt extra comfortable with the direction of the USD/JPY rate, you could have supplemented your binary options earnings by opening a long forex position on USD/JPY.
If you would have opened your long position at 2:00 and closed it at 4:30, for example, you could have added another 94+ pips to your trading profits for the day.
Keep in mind that this strategy is risky and should only be implemented where there is an unusual or major event that takes places that will fundamentally affect the value of a financial asset. When an event like that comes around, you may be in a good position to increase your trading profit by stacking your binary option investments on the same underlying asset.
Remember, the financial markets are constantly being influenced by myriad factors so there is no guarantee that this strategy will always work in your favor. However, when used appropriately, binary options may help increase a trader’s profit margins.