Binary Options: Strategies for Directional and Volatility Trading

Foreword

Binary options are a relatively new and unique way to take part in the financial markets. Over the past decade they have become popular instruments in Europe and Asia, and more recently, over the past few years, have not only gained acceptance, but have seen widespread growth in the United States, particularly within the retail trading community.

One may ask, “Why, with all of the investment vehicles available, stocks, futures, forex, options, exchange-traded funds, and so on, would I want to take a look at another contract type?” This is a legitimate question.

One of the main reasons traders may look to a contract like a binary option is risk control. Any seasoned trader in any market knows that profitability on any given trade is secondary, but risk management on every trade is mandatory and of the utmost concern. This is particularly true when participating in leveraged markets such as futures and currencies, where one mistake can not only result in large losses, but in some cases, losses that exceed the amount of capital in the trader's account. This can create an ugly scenario for any trader—the dreaded margin call. If you're not familiar with this concept, just think of the reaction of Randolph and Mortimer Duke at the end of the movie Trading Places and you may have a good idea of the devastating effect a margin call can have.

In the case of a binary option, whether I am buying or selling, my risk is always limited and 100 percent defined up front, before the order ...