Binary Options: Strategies for Directional and Volatility Trading

A straightforward guide to trading a unique class of options to improve returns, hedge risk, and make smarter bets during volatile trading

One of the great things about binary options is that you can use them to reap big profits from volatility in the markets with only a minimal capital investment. Unlike plain–vanilla put/call options, which require relatively high deposits, binary options provide access to exciting new speculative horizons with only a $100 deposit for every contract.

This groundbreaking guide from expert Alex Nekitrin gives you the complete lowdown on binary options: what they are, how they work, where they′re traded, what underlying assets they′re traded on, and how to incorporate them in any trading system. Step by step, and with the help of tons of trading examples, Nekitrin covers all the bases for novices and veteran traders alike, including:

What binary options are, where they′re traded, and what instruments they′re traded on The 6 big ways binary options differ from other types of options The potential risks and rewards of trading binary options Proven techniques for using them to speculate on a variety of markets The mechanics of binary options trading from reading price quotes to ordering options tickets Binary options transaction costs Basic binary trading strategies, including long, short, range–bound, breakout–bound, and more Directional and volatility trading strategies using both technical and fundamental analysis Tips on how to create your own binary option trading system Expert advice on how to manage your binary options accounts to control risk and protect gains Little known techniques for profiting from volatility with binary options trading

Don′t miss this opportunity to learn how to use this powerful and versatile tool for hedging risk, improving the overall effectiveness of your trading system, and reaping substantial gains, even during extreme market volatility.

Foreword xi

Preface xiii

acknowledgments xvii

Part I Introduction to Binary Options 1

Chapter 1 What are Binary Options? 3

On What Asset Classes Are Binary Options Available? 3

Binary Options vs. CBOE (Vanilla) Put/Call Options 10

Advantages/Disadvantages of Binary Options 13

Reasons to Trade Binary Options 14

Part II Binary Options theory 17

Chapter 2 What Does Binary Mean? 19

Components to a Binary Option 20

Long Trading 22

Short Trading 24

Chapter 3 Pricing 29

Strike Price 29

Time Value 30

Price as a Natural Market Consensus 32

Reading a Binary Option Chain 35

Part III Trading Binary Options 41

Chapter 4 Binary Options Contract Collateral 43

Margin and Debit Risk of Vanilla Options and Futures 43

Collateral Explained 44

Binary Options Expiration Values 44

Collateralizing a Long Trade 45

Collateralizing a Short Binary Options Trade 50

The Mechanics of a Binary Options Short Trade 50

Chapter 5 Settlement 59

Settlement on Binary Option Long Trades 59

Commissions and Fees 73

Chapter 6 Entering and Exiting Binary Option Trades 75

Reading Quotes 75

Reading an Order Ticket 76

Exiting Trades 78

Exiting Your Trade before Expiration 81

Chapter 7 Keys to Trading Binary Options and More Examples 95

Gold Binary Examples 96

Copper Binary Examples 99

Part IV Binary Options Trading Strategies 105

Chapter 8 Volatility Trading Explained 107

Taking a Volatility Long Position (Buying Volatility) 108

Regulating Success Probability and Payout with Strike Prices 111

Taking a Volatility Short Position (Selling Volatility) 113

Regulating Range and Payout with Strike Prices 116

Max Loss, Collateral, and Max Profit Summary Table 120

Chapter 9 Binary Option Behavior as Expiration Approaches 123

Understanding Delta 123

Delta and Price 127

Chapter 10 Technical Trading Strategies with Binary Options 129

Support and Resistance 130

Breakout Trading 135

Chapter 11 Fundamental Trading Strategies with Binary Options 139

News Releases 139

Political Events 144

Speculating on Actual News Releases 147

Economic Data Releases that You Can Speculate On 149

Part V Creating Your Binary Options Strategy 153

Chapter 12 Systems with Binary Options 155

Finding Your Edge 155

Proper Trading System Development 156

Back–Testing Binary Options Strategies 158

Three Back–Testing Rules 162

Chapter 13 Negative Emotions 165

Greed and Fear 166

How to Handle Negative Emotions 166

Find the Right System for You 168

Practical Steps to Mitigate the Negative Emotions 175

Chapter 14 Risk Management 183

The Process 184

Determining Position Size 185

Risk Management on Option Spreads 190

Relationship between Position Size and Trading Psychology 199

Handling Unexpected Market Volatility 199

Benefits of Binary Options on Trading Psychology 202

Discipline of Expiration 206

Part VI Managing Your Binary Options Account 209

Chapter 15 Proactive System Improvement 211

System Cutoffs 212

Drawdown 212

Consecutive Losing Trades 215

Reinvestment Rate 216

Diversification and Account Distribution 220

Intersystem Diversification 220

Account Breakdown 221

Part VII Profiting with Volatility 223

Chapter 16 The Volatility Short Trading Rules 225

Premium Collection 226

Rule 1: Cut Off Your Losing Trades 231

Rule 2: Collect Enough Premium 234

Rule 3: Sell Far Enough Away from Market Price 240

Rule 4: Use Underlying Instruments that Revert to the Mean 242

Rule 5: Sell Options with Proper Duration until Expiration 244

Rule 6: Perform Additional Analysis in Order to Get a Feel for Market Direction 246

Rule 7: Attempt to Make Your Market 255

Conclusion 256

Glossary 259

Index 263

Alex Nekritin is CEO and President of TradersChoiceFX, TradersChoiceOptions, and TCForex, one of the largest introductory brokers in the world. Mr. Nekritin has been trading in equities, options, futures, and Forex very successfully for more than a decade. He holds a degree in finance with a concentration in derivative instruments from Babson College in Wellesley, Massachusetts. Alex′s work has been featured online at FXStreet.com and TradingMarkets.com.