Forex options are becoming more and more popular nowadays among Forex traders as an additional tool for short-term speculations which are based on technical events. Although binaries are still young and suffer from liquidity and hence high premiums, Swing-Traders, Scalpers and Day Traders find the predetermined risk-reward ratio (~70% on trades that are "In the Money", and 10% on trades that are "Out of the Money",) extremely productive.
Illustration of a binary option at StartOptions.com
We had the opportunity to discuss with StartOptions.com Head of Dealing J. Mavor:
Traders like to trade around market events or chart patterns. The stronger the event or the pattern, the more volume they will attract and improve the odds of breakout success. Quite often a false breakout can frustrate your expectations. This happens when not enough volume concentrates around the event, leading to a pullback before you had a chance to take profit. However pullbacks do not have to eat at your profits, if you trade the event with a Binary Option.
For example, on 17/02/2010 the FOMC Meeting Minutes failed to generate enough volume for the EURUSD to create a sustaining rally. As the image illustrates, eventually a pullback at 20:00 GMT to the event level at 19:00 GMT of 1.36167 would have left you with no gains and lost on the spread. Had you traded a Binary Option you would have made $70.
Here is how:
- At the time of the event you place a Put Binary Option trade on StartOptions.com. The cost of the trade is $100, returning $170 if the price ends below 1.36167 or $10 if the price ends above, It’s that simple.
- Since the price returned almost back to the breakout level, I made $170 on my Binary Option trade, whereas I would have made $0 and even paid for the spread had I traded the EURUSD directly.
So, basically what the Binary Option offers me is a way to profit on weak events, so I can target many more events. Otherwise we have to wait for GDP or other big news or patterns that generate sustaining breakouts.
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