Because currencies are one of the products that can be traded in binary fashion, it only made sense for us to take up a discussion related to this form of trading.  Before we start looking at binary option trading strategy it is important to understand some of the terminology that allows us to discuss it.  There is a lot more terminology for binary options than appears here, so understand this is only to serve the purpose for today’s reading and in the future we can go into more advanced terminology.  You may also be interested in seeing the brokers available in South Africa for binary options trading.

Some Useful Binary Options Trading Terminology

Gearing – the practice of creating a derivative investment that represents many units of the underlying investment, at only a fraction of their value. For example, one contract on company ABC might cost $100, but represent 100 shares in the company, which have a total value of $10,000 (gearing of 100:1)

Spot Price – The price of the underlying investment at the time the trade is made

Strike Price – The price at the expiry of the contract

Call Option – An option that pays out when the underlying investment increases in value

Put Option – An option that pays out when the underlying investment decreases in value

In/Out of The Money – An option is “in the money” if it has met the terms of the options contract. In the above example, the option would have been in the money if it had ended the hour 50 pips or more above the spot price. It would be “out of the money” if it had failed to reach this point.

Basic Binary Options Trading Strategy

There are at least half a dozen well known and commonly used binary options trading strategies, but the one we’re going to look at is called the “straddle” trade (sometimes called a “strangle” as well). A straddle trade is useful when you think that the underlying investment will experience massive volatility, but you are unsure about the ultimate direction it will take. It is an unlimited profit, limited loss investment – provided it is done right.

A long straddle (which is the type we’ll be dealing with) involves buying long call and put options on the same underlying investment at the same strike price. Let’s take a look at an example:

Say you buy a USD/GBP 95 cent straddle (call and put options) for 3 cents which expires in 1 month. If the USD/GBP price increased to 102 cents, you would have a gross profit of 7 cents per option. Remember, you will have paid 1.5 cents in premiums for the call and 1.5 cents for the put for a total of 3 cents, but the market move makes up for the premium you paid by going up 7 cents which generated a profit of 4 cents (7 cents – 3 cents = 4 cents).

Put slightly more simply, and if we take the $100 example above – you would lose $75 on the one trade, and gain $75 on the other. This would result in a neutral trade, but if you use delta hedging to protect yourself from the downside position, you can come out with a net gain after you’ve paid your premiums. Your risk (delta) is officially zero, but because of your premium it is non-zero. You will need to short or long-sell the market you are trading in order to zero this delta.

If it all sounds a little bit confusing, then you just need to read through as much as you can, and log plenty of hours on practice accounts, so that you understand how binary options trading works both in theory, and in practice.

One Concern for South Africans

Your main concern in South Africa when trading international markets using a desktop or browser-based trading platform is your internet connection. It will serve you well to shop around and choose a platform that has the lowest latency, preventing you from losing out because of the time it takes for signals to get from your computer to the dealing desk and back.