Range Binary Option explained

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Range Trading Strategy

Binary Options Range Trading Strategy

Today, we shall examine another binary options trading strategy, which is exclusively used for trading the In/Out binary option, otherwise known as the boundary trades.

A boundary option is one trade option that gives four possible outcomes, depending on the broker that you are using. The trade outcomes are as follows:

a) Ends outside the range: Here the option is in the money if the price action is outside the selected price boundaries on expiry.

b) Ends inside the range: Here the option is in the money if the price action is inside the selected price range on expiry of the contract.

c) Stays between the price boundaries, in which case, the price action should at no time, breach any of the boundaries.

d) Goes outside the price boundaries: Where the trader needs the price action of the currency to breach the selected price boundaries just once to make a profit from the trade.

This gives the binary options trader ample opportunity to decide which trade is best for him at that point in time.

Trade Setup

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The first step in using this trading strategy is to decide on the range to use. Range trading works best when the market is consolidating or in other words, when the market is trading sideways and not trending. In a trending market, rising or falling prices make it impossible to predict a price floor or ceiling, thus severely blunting the trader’s ability to profit from this trade.

The best way to detect a range-bound market is to use an indicator that shows you exactly in what direction the market is trading. One such indicator is the Bollinger band. Invented by John Bollinger, the Bollinger band has a lower band, a middle band and an upper band. The upper and lower bands show the confines of price movement in a consolidating market. Take a look at the chart below to see the illustration:

Looking at this daily chart of the EURUSD, we can clearly see that between June 10 and 1 st September, the market was range-trading. The Bollinger bands reveal the range of prices between the price floor and price ceiling.

Once you have something like this showing on your charts, use your horizontal line tool to trace two lines as shown. You now effectively have the 2 strike prices you need for your boundary trade.

Trade Types to Execute

You can now decide on which of the four boundary trade option contract types to purchase, and set relevant expiry dates. Most brokers will allow a minimum of 7 days for expiry, so make sure that the period of consolidation will at least, exceed that time frame. If you use a daily chart like we did above in this example, you will be able to get enough time to set an expiry.

Final Note

The boundary trade is not the only binary option contract that you can trade with this strategy. You can also use this strategy to trade a Touch/No Touch option contract. The bias here should be for a No Touch option contract, taking time to set the price barrier either to the upside or downside, well outside the range of prices as demarcated by your price floor and price ceiling. This way, you are sure that the price action of the underlying asset has no chance whatsoever of coming close to your price barriers.

If you need the price action to breach the boundaries, you can adjust your price barriers accordingly to make this happen.

Binary Option

What is a Binary Option?

A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.

A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires.

Binary Options Outside the US

Basics of a Binary Option

A binary option may be as simple as whether the share price of ABC will be above $25 on April 22, 2020, at 10:45 a.m. The trader makes a decision, either yes (it will be higher) or no (it will be lower).

Let’s say the trader thinks the price will be trading above $25, on that date and time, and is willing to bet $100 on it. If ABC shares trade above $25 at that date and time, the trader receives a payout per the terms agreed. For example, if the payout was 70%, the binary broker credits the trader’s account with $70.

If the price trades below $25 at that date and time, the trader was wrong and loses their $100 investment in the trade.

Key Takeaways

  • Binary options depend on the outcome of a “yes or no” proposition.
  • Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
  • Binary options set a fixed payout and loss amount.
  • Binary options don’t allow traders to take a position in the underlying security.
  • Most binary options trading occurs outside the United States.

Difference Between Binary and Vanilla Options

A vanilla American option gives the holder the right to buy or sell an underlying asset at a specified price before the expiration date of the option. A European option is the same, except traders can only exercise that right on the expiration date. Vanilla options, or just “options,” provide the buyer with potential ownership of the underlying asset. When buying these options, traders have fixed risk, but profits vary depending on how far the price of the underlying asset moves.

Binary options differ in that they don’t provide the possibility of taking a position in the underlying asset. Binary options typically specify a fixed maximum payout, while maximum risk is limited to the amount invested in the option. Movement in the underlying asset doesn’t affect the payout received or loss incurred.

The profit or loss depends on whether the price of the underlying is on the correct side of the strike price. Some binary options can be closed before expiration, although this typically reduces the payout received (if the option is in the money).

Binary Options and Regulation

Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies, but most binary options trading occurs outside the United States and may not be regulated. Unregulated binary options brokers don’t have to meet a particular standard; therefore, investors should be wary of the potential for fraud. Conversely, vanilla options trade on regulated U.S. exchanges and are subject to greater oversight.

Real World Binary Options Example

Nadex is a regulated binary options exchange in the United States. Nadex binary options are based on a “yes or no” proposition and allow traders to exit before expiry. The binary option’s entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.

Let’s assume stock Colgate-Palmolive Co. (CL) is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at 12 p.m. The trader can buy the option for $40. If the price of the stock finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).

If the option expires and the price of the Colgate is below $65 (out of the money), the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100 with a Nadex binary option.

If the trader wanted to make a more significant investment, he or she could change the number of options traded. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.

Non-Nadex binary options are similar, except they typically aren’t regulated in the United States, often can’t be exited before expiry, usually have fixed percentage payout for wins (whereas Nadex payouts fluctuate based on the price paid for the option) and may not trade in $100 increments.

Binary Options Range Type

The range type trading option was recently introduced to the market and the leading brokers already display and include this type into their standard offer. The range option is a type of binary options enabling traders to choose a price range that the chosen product will stay in until the expiration date. The asset price is not to exceed the given timeframe selected by the trader. The range is often called a channel because it resembles one. The broker sets the range and the trader selects the asset, the investment amount and decides whether the price will stay within or exceed the range. You will easily recognize the channel on your chart after placing your trade, because it will assume a different color than the rest of the chart. This binary options type is more suitable for experienced traders who already know the market and who have developed relevant trading strategies. Channel trading has a great return rates up to 300% which many traders find appealing. This type can also be used the opposite way and is then called the Out of Range Trade. Hereby, traders bet that the price asset will break through the predetermined range by the end of the trade.

How Range Trading Works?

It is easy to understand range trading, but figuring out winning strategies can be complex. We already said that the main idea is to predict if the asset price will stay within or exceed the boundaries of the given range. The high and low prices that border the so-called tunnel will be displayed. After you place the trade, you will be able to see the asset price move up and down reflecting the current market conditions. This kind of trade is usually offered with a 30 minute or a 24 hours expiry time. This is just a general indication given that timeframes vary from broker to broker. Channel trading requires technical analysis and they can be profitable in short-term or medium-term trades. Assets of medium volatility are the recommended choice when opting for range trading. Volatility is the main feature determining your profit. Enhance your profits with this strategy by analyzing and combining other factors related to assets and volatility.

Before Range Option was an Option

Back in the days when the binary options range type was not available as an option, it had to be “chased” or tracked down on the chart. It used to be a great indicator of the right timing to sell or buy a position. This technique indicated or still indicates the ideal selling and buying points. The best time for selling a position is when the asset price moves to the upper boundary. The best condition for keeping a position is when the asset price dangles in the middle. We can see that the range type is derived from this trick of traders who used the range patterns as trading signals.

Common Mistakes with Range Option

  1. Your first task is to find an asset, possibly one that moves rhythmically. Unfortunately, one of the most common mistakes made by traders is that they assume that the trends will stay within the channel, but without a strategy, it is most probable that the trend will break through the channel.
  2. Traders often wait for the price to touch the trend line before they buy or sell it. Traders have to understand that the asset price will not move right to the trend line and then miraculously bounce back into the channel range. Therefore, if you see that the asset price is about to move over or below the trend lines, sell or buy your position before it is too late.

How to Apply the Range Option?

Let’s say you want to trade stock of a well-known company like Google. You believe that Google’s stocks will be traded between $150 and $155 next week. If the stocks should end up at $149 or $156 you will lose your investment. But if the stock price stay within your predicted range ($152, $154, etc.) you will win your trade.

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