Volatility Trading Explained
With binary options you are not limited to directional trading only. Volatility trading presents a unique opportunity to trade based on the magnitude of market moves rather than market direction. Volatility trading means that you are not trying to predict a direction in the market, but rather you are simply speculating whether the market will stay in a certain range or come out of the range in either direction. In other words, you no longer need to predict where the underlying will go. Instead, you are trying to speculate how much it is going to move.
You can also use binary options to speculate on where the market will not go. Let's assume that you see a strong support area and are confident that the underlying asset will not reach this area. Yet you are unsure if it is going to go up or down in the short term. You can use binary options to simply speculate on the assumption that the underlying will not breach the support area without having to worry about forecasting the directional move.
Before we go into the mechanics of volatility trading with binary options, here are a few terms you need to be familiar with:
- Option spread. An option strategy that involves buying and selling two or more different option strike prices.
- Leg. An options term that refers to one side of a spread transaction. For instance, a trader might buy an option that has a particular strike price and expiration date and then sell another option that has a different ...