Binary Options Strategy: Closing your Option before Expiry

BinaryOptionsNow | Published on September 11, 2011 at 9:52 am

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One of the reasons many financial investors and traders turn to binary option trading is that these digital options are limited risk financial instruments where both the potential loss and potential gain are known at the time the trade is executed. Typically, standard binary options offer two possible payouts: 1. In-the-money payout (typically up to 85%) at expiry; or 2. Out-of-the-money payout (from 0 to as much as 15%) at expiry.

However, this fixed payout structure can also be a restricting factor for traders who are used to being able to take profit and/or stop loss when an asset is either trading above or below its purchase price. In order to remedy this, some online options brokers allow binary options to be sold before expiry for a price that fluctuates along with the underlying asset’s value.

In this article, we will review options broker OptionFair’s “closable” binary option, which allows traders to sell their binary options before expiry at a price that is determined by the underlying asset’s value at the time the option is sold.

 

OptionFair

OptionFair.com is a well-established online options broker that offers traders the ability to trade a wide variety of underlying assets via three different types of binary options: High/Low, Range and Touch options. (Click here for a full review of OptionFair). The website is powered by a trading platform that also powers other binary options broker websites such as 24Option.com.

The OptionFair trading platform has a unique feature that allows traders to sell a binary option before it expires either at a loss or at a gain depending on the value of the binary option’s underlying asset at the time it’s sold.

The binary options that can be sold before expiry are listed as “Closable,” which is clearly visible above the section where traders insert their investment amount.

If the option is listed as “Closable: Yes,” this means that a few minutes after you execute that option trade, the trading platform will begin listing a rate at which you can choose to sell the option before expiry. This feature gives traders the ability to both limit their losses if their asset is trading contrary to their prediction and gain a profit if the asset is trading in a favorable direction.

Although the sale price before expiry that OptionFair offers will never be higher than the potential in-the-money payout for the option in question, it does allow traders to make a certain – albeit smaller – profit. And, as the old saying goes: “one in the hand is worth two in the bush”; sometimes a smaller but certain profit is better than a larger predicted profit.

 

Selling a Binary Option Before Expiry

In order to close a binary position early on OptionFair, the binary option must be listed as “Closable.”

Binary Options Trading

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Once you’ve invested, OptionFair will typically begin issuing close early quotes a few minutes following the trade’s execution. The ability to close the option’s position early is available until several minutes before the option expires, at which point trading closes and the results of the trade are either in-the-money or out-of-the-money.

 

Selling at a Loss

If the option’s underlying asset is trading out-of-the-money, the closable sale price will be less than the investment amount since the option would not be on track to turn a profit. Here is an example of a sale price for an option that is trading out-of-the-money:

Sell binary options

You can see that $100 was invested in that EUR/USD would finish the option period above the target price of 1.36742 and the exchange rate is currently at 1.36683 – below the target price. Thus, the option is currently predicted to finish out-of-the-money. OptionFair is offering $62.36 to close the position early, thereby generating a $37.64 loss ($62.36 – $100).

 

Selling at a Profit

If the option’s underlying asset is trading in-the-money, the closable sale price will typically be more than the amount invested in the option since the option is predicted to close at a profit. Here is an example of an early sale price for an option that is trading in-the-money:

How to trade binary options

One can see that $100 was invested in that EUR/USD would finish the option period below the target price of 1.36593 and the exchange rate is currently at 1.36524 – below the target price and thus in-the-money. OptionFair is offering $110.01 to close the option position now, thereby generating a $10.01 profit ($110.01 – $100).

 

Conclusion

The ability to close a binary option early gives traders and investors more control over their investments so they can either limit losses or take profits as soon as they’re available. OptionFair is one of the few binary brokers that allows traders the ability to close their positions early via an intuitive platform that offers a close early rate as the underlying asset’s value evolves.

(TraderXP.com – an options broker powered by a separate trading platform (SpotOption) – also allows traders to “double up” on options that are trading in-the-money and “rollover” options that are trading out-of-the-money. Click here for a review of these TraderXP features.)

This ability to close positions early can greatly increase trading profits by allowing traders to take profits when they appear instead of waiting for expiry and limit losses when necessary.

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