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Binary Options: Strategies for Directional and Volatility Trading

ISBN: 978-1-118-40724-0
288 pages
December 2012
Binary Options: Strategies for Directional and Volatility Trading (1118407245) cover image
The first comprehensive guide to trading a unique class of options to manage risk and make smarter bets during volatile trading

Providing savvy market players with a way to react quickly to event-driven opportunities and trends, exchange traded binary options are a unique type of derivative instrument offering fixed risk and reward. Available on four asset classes—stock index futures, commodity futures, Spot Forex and economic data releases—they are distinctly different from regular put/call options in that their pay-out structure offers only two potential outcomes, or settlement values: 0 or 100. The first guide focussing exclusively on this fast-growing sector of the options market, Trading Binary Options examines the key differences between regular options trading and binary options trading and describes how binary trading is done. It also gives you the lowdown on the most successful binary trading strategies and how and when they should be deployed.

  • Outlines a rigorous approach to trading directionally around specific events, such as an earnings release, a shift in currencies, or a release of economic data
  • Provides the first comprehensive coverage of an increasingly popular but poorly understood trading instrument
  • Offers in-depth discussions of the six characteristics that distinguish binaries from other options and that make them such an attractive vehicle for hedging risk and improving returns
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Foreword xi

Preface xiii

acknowledgments xvii

Part I Introduction to Binary Options 1

Chapter 1 What are Binary Options? 3

On What Asset Classes Are Binary Options Available? 3

Binary Options vs. CBOE (Vanilla) Put/Call Options 10

Advantages/Disadvantages of Binary Options 13

Reasons to Trade Binary Options 14

Part II Binary Options theory 17

Chapter 2 What Does Binary Mean? 19

Components to a Binary Option 20

Long Trading 22

Short Trading 24

Chapter 3 Pricing 29

Strike Price 29

Time Value 30

Price as a Natural Market Consensus 32

Reading a Binary Option Chain 35

Part III Trading Binary Options 41

Chapter 4 Binary Options Contract Collateral 43

Margin and Debit Risk of Vanilla Options and Futures 43

Collateral Explained 44

Binary Options Expiration Values 44

Collateralizing a Long Trade 45

Collateralizing a Short Binary Options Trade 50

The Mechanics of a Binary Options Short Trade 50

Chapter 5 Settlement 59

Settlement on Binary Option Long Trades 59

Commissions and Fees 73

Chapter 6 Entering and Exiting Binary Option Trades 75

Reading Quotes 75

Reading an Order Ticket 76

Exiting Trades 78

Exiting Your Trade before Expiration 81

Chapter 7 Keys to Trading Binary Options and More Examples 95

Gold Binary Examples 96

Copper Binary Examples 99

Part IV Binary Options Trading Strategies 105

Chapter 8 Volatility Trading Explained 107

Taking a Volatility Long Position (Buying Volatility) 108

Regulating Success Probability and Payout with Strike Prices 111

Taking a Volatility Short Position (Selling Volatility) 113

Regulating Range and Payout with Strike Prices 116

Max Loss, Collateral, and Max Profit Summary Table 120

Chapter 9 Binary Option Behavior as Expiration Approaches 123

Understanding Delta 123

Delta and Price 127

Chapter 10 Technical Trading Strategies with Binary Options 129

Support and Resistance 130

Breakout Trading 135

Chapter 11 Fundamental Trading Strategies with Binary Options 139

News Releases 139

Political Events 144

Speculating on Actual News Releases 147

Economic Data Releases that You Can Speculate On 149

Part V Creating Your Binary Options Strategy 153

Chapter 12 Systems with Binary Options 155

Finding Your Edge 155

Proper Trading System Development 156

Back-Testing Binary Options Strategies 158

Three Back-Testing Rules 162

Chapter 13 Negative Emotions 165

Greed and Fear 166

How to Handle Negative Emotions 166

Find the Right System for You 168

Practical Steps to Mitigate the Negative Emotions 175

Chapter 14 Risk Management 183

The Process 184

Determining Position Size 185

Risk Management on Option Spreads 190

Relationship between Position Size and Trading Psychology 199

Handling Unexpected Market Volatility 199

Benefits of Binary Options on Trading Psychology 202

Discipline of Expiration 206

Part VI Managing Your Binary Options Account 209

Chapter 15 Proactive System Improvement 211

System Cutoffs 212

Drawdown 212

Consecutive Losing Trades 215

Reinvestment Rate 216

Diversification and Account Distribution 220

Intersystem Diversification 220

Account Breakdown 221

Part VII Profiting with Volatility 223

Chapter 16 The Volatility Short Trading Rules 225

Premium Collection 226

Rule 1: Cut Off Your Losing Trades 231

Rule 2: Collect Enough Premium 234

Rule 3: Sell Far Enough Away from Market Price 240

Rule 4: Use Underlying Instruments that Revert to the Mean 242

Rule 5: Sell Options with Proper Duration until Expiration 244

Rule 6: Perform Additional Analysis in Order to Get a Feel for Market Direction 246

Rule 7: Attempt to Make Your Market 255

Conclusion 256

Glossary 259

Index 263

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Alex Nekritin is CEO and President of TradersChoiceFX, TradersChoiceOptions, and TCForex, one of the largest introductory brokers in the world. Mr. Nekritin has been trading in equities, options, futures, and Forex very successfully for more than a decade. He holds a degree in finance with a concentration in derivative instruments from Babson College in Wellesley, Massachusetts. Alex's work has been featured online at FXStreet.com and TradingMarkets.com.

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Binary Options: Strategies for Directional and Volatility Trading (US $85.00)

-and- The Risk of Trading: Mastering the Most Important Element in Financial Speculation (US $75.00)

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