FInvestors are slowly beginning to discover the simplicity of the binary options market. As a market with much less left to chance, the binary options market represents a more level playing field for the average investor. Much of the siFmplicity of the binary market comes from the fact that there are only three major ways to trade binary options as opposed to a near unlimited number of ways to trade traditional options.
As a matter of fact, the market makers in the traditional options market are paid specifically to come up with new types of options that the average investor will not understand. This was one of the major causes of the housing and banking crisis in 2008. The binary market does not work this way.
Below are the three major ways to trade binary options and the situations in which they might be most useful to an investor.
1. High/low Options
The high/low binary option is by far the trade that is made the most. It is also the simplest to understand: The investor is betting that a certain option will either hit a certain strike price or not hit it. If the investor is correct, then he profits from the investment.
High/low options are best used when an underlying investment has not shown a great deal of volatility in the recent past. This gives an investor a better indication that there will be no sudden price changes. If there are no sudden price changes, then the price of the option at a certain time can be calculated to a high probability.
High/low options also work best in a calm macroeconomic market. When there are no external causes for volatility, binary options become even easier to predict.
2. Touch/No touch Options
“Touch” refers to an option touching a specific strike price within any point in its term. The difference between high/low options and touch/no touch options is that a touch option pays off for the investor if the option touches the strike price at any point during the life of the option. In order for a high/low option to pay off, the price must end above/below the strike price at the end of the life of the option.
There are also binary options known as double touch options. Double touch options pay off if an option touches a certain strike price twice during the life of the option. Because this is a more difficult proposition, these double options usually pay off more.
No touch options are the exact opposite of touch options. A “no touch” option pays off if an option never touches a particular strike price during its lifetime.
Touch/no touch options are best used when volatility in the market is high. This gives an option the greatest chance for touching a particular price twice. Volatility is actually required in this circumstance because a price must curve up and down in order to touch a point twice – stagnant options do not pay off. No touch options are best used when the price of a company option is remaining stable despite the volatility of the larger market. If an option can withstand macroeconomic forces that are trying to move it, it will likely not move much in based on any internal company situation.
3. Tunnel Options
A “tunnel” refers to a range of prices that an option must stay within. If an option stays within this range during its lifetime, the option will pay off for the investor. On the contrary, there are also options that pay off if the price of an option stays outside of a tunnel.
Tunnel options are more likely to pay off in a calm market with a stable company. A company is much more likely to remain within a certain price range in a calm market with a company that has a steady price to begin with.
Binary options not only allow investors to simplify the investing process, they also allow the investor to choose an investment style directly. By choosing wisely between the three choices of binary options, investors have a great chance of coming out on top in the market.