Making Money with Binary Options

It is true that making money with binary options is risky, no doubt of that, but unlike a spin on a roulette wheel in the binary options trade the outcome of the trade can be influenced by the players in the game and the outside environment.  Further – the outcome of a binary options trade can be anticipated, if not necessarily predicted by the state of the environment when the trade is executed.  The beauty of making money with binary options is that you don’t have to be right by much.  Being right by one cent is the same as being right by $100.

Binary Options Trading on the Most Liquid Securities

One system (take our free trading course to review all our base strategies) I try to use when trading stocks is that of kissing the bridesmaid rather than the bride.  What I mean by this is that if HP posts good results on a given day and the indication is that results were good in general for PCs and server sales, that I would want to try to be in there making money with binary options trading on Dell stock for example.  Likewise if I’m hearing the the economic numbers for auto imports and the numbers are good then odds are that the numbers will be good for VW for example, and the market will react to that.   If you happen to catch VW before it jumps then odds are you’ve beaten the market to the punch. (continued below)
 

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Many Times the Stock Market Has Already Moved Before You Get Your Day Trading Done

If on the other hand the market for VW has already jumped you may actually have an opportunity to play the OPPOSITE (buying a binary PUT option instead) in anticipation of a market overreaction (and hence settling later at a lower price than present price) to the hypothetical good fortune of imported auto makers.  Sadly enough it happens ever single day.  When retail investors try to jump on a trend like good news, often the market makers have already moved the ask price above where it ought to be in order to burn the moths (us) as we race into the flame (the good news).  Don’t believe me?  You need to read this.  When I am going opposite the market I would want to be looking at an ‘end of day’ binary option rather than a ‘top of the hour’ binary option – as I will be looking for the market for the stock (VW in our example) to close lower at days end when the market closes.

Quantity Is More Important Than Quality in Trading Binary Options

Making money with binary options by trading on news (the kissing the bridesmaid method) is arguably the way your best traders will make their money in this venue.  Being ahead of the curve or taking advantage  of the over aggressive actions of retail investors over-shooting the market is where the highest quantity of trade opportunities will be.  Quantity of good trade opportunities is what matters when making money with binary options.  Binary options traders do not care how big the movement will be… they only care which direction.

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Check out the following binary options trading example:

A Binary Option Trade with Call and Put Positions

Combining a binary option trading system with a call position and a put option can be a powerful strategy to make money with this exotic option security. Getting two winning trades while hedging an initial position mitigates a great amount of the riskiness in these quote unquote all or nothing strategies. This strategy is only possible using a zero spread zero commission binary option broker.

A Binary Option Trade with Call and Put

How a Winning Position Can Be Hedged Before Trade Lock-out

One of the great risks associated with trading binary options is the risk of having a favorable trade suddenly turn sour and result in a loss. What many people don’t realize is that a binary position does not have to be an all or nothing outcome if you know how to setup and execute what ultimately results in a saddle position.

Binary Option Trade Example

Starting with a Binary Call Option

In our example we’ll presume that you have picked up a call option on Google stock and that option is presently in the money.

Presently Google is trading at $579.00/share today, so let’s work with that. Let’s presume you picked up a binary call option at 10:15am this morning that expires at 11:00am. Let’s also assume your option had a spot (strike) price of 577.50 per share and the contract size was $200, with a 75% yield in the money and a 15% yield out of the money. What are your present outcomes in this situation?

Analysis of the Payout Scenarios of a Single Binary Option

Static-State Analysis of Initial Trade Position

At this point you’ve got a good position – your $200 binary call option is in the money and so long as nothing changes your payout will be $350 ($200 investment plus $150 profit). If things turn sour and the Google closes below the strike price of $577.50 then you’ll receive $30 (15% return of investment with $170 loss). That’s a pretty wide disparity of potential outcomes.

How can you improve the likelihood of a more favorable outcome from this initial favorable position?

Adding a Binary Put Option Hedge to an Initial In the Money Trade

Making a Straddle Payout Scenario Reduces Loss Risk

One way to mitigate the risk of losing a favorable position is to hedge the initial in the money call binary option with a new binary put position at the current spot price. Given in our scenario our Google stock is trading at $579.00 then a put option in the binary option market will have a spot price of $579. We’re worried about Google stock turning south out of our control, and binary option lock out is approaching (15 minutes prior to expiration). How can we improve our risk/return position given our present favorable binary option trade?

Taking a $200 put position in Google with a strike price of $579 and payout of 75% in the money or 15% return of capital out of the money creates a terrific hedge position for your in the money call option bought at $577.50 earlier.

How has your payout scenario for your binary option positions changed?

Payout Schedule for a Binary Option with Call and Put Positions

Starting with an “In the Money” Position Puts a Trader in a Powerful Position

You’re about to see why having an in the money binary option is a very powerful position to be in. Let’s re-cap where we are and how we got here. We started at 10:15am in the morning and bought a binary call option, investing $200 with a spot price of $577.50 in Google with a payout of 75%/15% and expiring at 11am. Later in the morning (around 10:35am) we’ve purchased a binary put option at $579/share. We’ve done this because we believe that there is a risk the market for Google stock might turn and we want to hedge our initial successful trade.

How successful is our hedge?

In order to see how good our hedge has been, we have to analyze this individual position payouts and sum them:

If the Google Price closes at $579.00/share exactly:
Our Binary Put Option is a push – returning our $200.00 investment
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $550. Net ROI: $150/$400 = 37.5% (not bad for an hour’s risk!)

If the Google Price closes above $579.00/share:
Our Binary Put Option is out of the money – returning our $30.00 of our initial $200 investment
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $380. Net ROI: -$20/$400 = -5% (not a tragedy)

If the Google Price closes between $577.51-$578.99/share:
Our Binary Put Option is in the money – returning $350.00 ($200 capital plus $150 profit)
Our Binary Call Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $700. Net ROI: $300/$400 = 75% (not bad for an hour’s risk!)

If the Google Price closes at $577.50/share exactly:
Our Binary Call Option is a push – returning our $200.00 investment
Our Binary Put Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $550. Net ROI: $150/$400 = 37.5% (not bad for an hour’s risk!)

If the Google Price closes below $577.50/share exactly:
Our Binary Call Option is out of the money – returning our $30.00 of our initial $200 investment
Our Binary Put Option is in the money – returning $350 ($200 capital plus $150 profit)
Net Investment: $400. Net Payout: $380. Net ROI: -$20/$400 = -5% (not a tragedy)


Binary Trade with Call and Put

Payout Recap

The ultimate result of hedging an initial successful (or in the money) position in a binary option trade by using an equal and opposite trade with the same expiration results in one of three payout outcomes:

If one trade is a push, the payout is a 37.5% profit

If both trades are in the money, the payout is a 75% profit

If one trade is in the money and one out of the money, the payout is a 5% loss

As you can see, this is a vastly improved profitability outcome versus our initial position of an “all or nothing” outcome of either 75% profit or 85% loss.

8 thoughts on “Making Money with Binary Options

  1. the chances of the price ending up between 577.50-578.99 are very low. Overall, wouldn;t it still be a losing strategy?

  2. This was purely an illustrative example based on how Google was actually trading on the particular day the binary options hedging article was written.

    Ideally we look for ways to improve out odds by watching forex movements and then acting for against particular equities indexes react to those forex movements… We wait for favorable conditions and make a naked trade and leave it open unless we see forex markets moving against us… but that’s just our strategy. You can get highly accurate binary options signals for different trade ideas.

    I hope that helped answer your question.

  3. Wow. a 5% loss or a 75% profit..not bad..never thought you could do that..I am planning to start binary option trading but would like some more tips about it. I would greatly appreciate it if you could at least email me some tips. I would like to be educated before I take the plundge. My email is jalson_ent@yahoo.com

  4. Im looking to learn as much about being a successful trader as possible.

  5. I would suggest reading these three books before investing a single penny:

    Read these three books

  6. sir, but what if the price goes down in the begining?

  7. There are means to hedge a bad position but it can mean throwing good money after bad. This is why the pros use binary trading signals to make the law of averages work in their favor.

  8. Pingback: Weekly Binary Options Trading Report 8/19/12 - Learn Options Trading and Binary Strategies at Make300aday.com

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