Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 7

Keys to Trading Binary Options and More Examples

Let's review some key facts to remember when trading binary options:

• Fact 1: If the market price is above the strike price at expiration, the contract value goes to $100. If the market price is below the strike price at expiration, the contract value goes to $0.
• Fact 2: You can always trade in and out of a binary option contract any time before expiration and settlement.
• Fact 3: The collateral you put up for a binary option trade is always equivalent to your maximum loss on the trade.
• Fact 4: Binary options have no calls or puts. They simply have conditions (also known as strike prices) that you can speculate on to be true or not. If you believe a condition to be true by expiration, you buy the binary option; if you would like to speculate for it to be false, you sell the binary option on that condition.
• Fact 5: You can never lose more than you put into a binary options trade. You put up your maximum loss as the collateral and can never lose more than you put up on your trade.
• Fact 6: The most collateral any contract will require you to put up on a trade is $100; typically, the collateral you put up will be less than $100 on any binary option contract.
• Fact 7: When trading a binary option, if you are correct on your trade at expiration, your account will always be credited $100 per contract. If you are incorrect at expiration, your account will always receive nothing.

Taking these facts into consideration, let's look ...