If you are a binary options trader who has spent a vast amount of time and money learning to trade, yet are not able to make money, then you are at the right article.
You already know how to use sites like www.binaryoptions.com enabling you to trade in binary options, the difference between call and put, bids and offers, as well as exercise prices and expiration dates.
However, if you’re still unable to make money then you need to stick to the following seven disciplines to maximize your rewards instead of the risks.
Steps to follow to get binary options right
Table of Contents
1. Know the Macro Picture
To succeed at binary options, you need to have basic knowledge of the direction the economy is headed.
In case the economy is growing, you need to employ bullish strategies like calls, call spreads, and short volatility plays. On the other hand, if the economy is shrinking, you need to execute bearish plays like puts, put spreads, and long volatility plays.
You need to keep in mind that your focus should be on what the economy does next. The options market is entirely dependent on what the upcoming trend is like.
To learn about the economic trends in detail you can take aid from an in-house economist or even a large brokerage house.
2. Track Industry Fundamentals
Out of over 100 different industries enlisted on the US stock market, hardly 10 to 15 are growing decisively. The rest of them are either stuck the way they are or are gradually shrinking.
If you are a major hedge fund institution or government then you might need to cover all of them. Whereas, if you are an individual working from home you should utilize your time, and resources along with your undivided attention to the handful of industries capable of making a change.
Many traders also tend to take this a step further by focusing on just one high-growth, volatile industry like Netflix or Tesla.
3. Focus on the Micro Picture
After you understand the economy, the trends, and the main industries, you should choose the best company to trade with. It’s important to find the best option since positions in single companies can give you double or even triple the returns of stock indexes.
However, you need to keep in mind that trading with a single company carries a larger risk than investing in multiple companies. The returns can be huge and make the risk worthwhile, but if they do fall, then the loss can be pretty big.
4. Take Volatility into Account
To get a good idea of an option’s price, you need to get some idea of the implied volatility of the options you are taking into consideration. Next, compare the implied volatility with the historical volatility of the asset as well as the level of volatility in the broad market.
Implied volatility informs you whether other traders expect the stock to move a lot or not. High implied volatility tends to promote premiums, which makes writing an option more attractive. whereas low implied volatility refers to cheaper option premiums, which makes buying options a good choice. You should buy the asset if you expect the underlying stocks to fluctuate enough to raise the asset’s price.
5. Recognize Events
Events can usually be specified into two categories: market-wide and stock-specific.
Market-Wide
Market-wide events are the ones affecting the entire spectrum of the market. This includes Federal Reserve announcements and economic data releases.
Stock Specific
Stock-specific events are the ones affecting targeted assets instead of the broader market. These events include earnings reports, product launches, and spinoffs.
Prior to its occurrence, an event can have a significant effect on a stock’s implied volatility. Whereas, post-occurrence, the event can have a huge impact on the stock’s price.
Therefore, identifying events is important so that you can predict the possible impacts on the underlying assets. It can also help you determine the timeline and expiration of your trade.
6. Form a Strategy
Keeping the analysis you conducted in the previous steps in mind, you’ve now determined your investment objective, the desired risk or reward, the level of implied and historical volatility, as well as marking the key events that may impact your underlying assets. Now, devising a strategy seems easier considering we have grasped most of the concepts.
For example, if you are a conservative investor with a sizable stock portfolio and are interested in earning premium income prior to companies reporting their quarterly earnings, you may opt for a covered call writing strategy involving writing calls on some or all of the stocks in your portfolio.
On the other hand, if you’re an aggressive investor who prefers long shots and believes that the market is about to hit a big decline, you may decide to buy puts or major stock indices.
7. Establish Parameters
After devising a strategy, all that remains is establishing the fundamental parameters, including expiration dates, strike prices, and option deltas.
For example, if you’re interested in buying a call with the longest possible expiration date at the lowest possible cost, this would make an out-of-the-money call suitable. You could also choose an in-the-money option if you want a call with a high delta.
Conclusion
Binary options are an easy-to-understand but tricky-to-conduct trading choice. If you feel stuck with it after investing your resources and not getting the desired outcome, then the above six steps are what you need most to get you back on track!
