Types of Binary Options: Call/Put
The peculiarity of the binary options market is the ability to trade an asset in different ways. This is quite different from other markets where profit or loss is defined in terms of an asset’s up or down movement.
Another peculiarity is that all binary options trades have a time limit. The trader must set an expiry for a trade. In the first part of this series on binary options trade types, we will examine the trade type that closely resembles the kind of trades that traders are used to, and this is the classical Call/Put trade contract.
The Call/Put goes by several names, depending on the platform the trader is using. Some of these names are Up/Down, Rise/Fall, Above/Below or High/Low. Whatever the nomenclature, the trade is the same: the trade outcome depends on the asset ending the trade at a price that is higher or lower than the market price at which the trade was entered.
How Does This Trade Work?
The trader selects an asset and does his trade analysis, then chooses the amount he wants to invest in the trade. He then selects either “CALL” or “PUT”, chooses an expiry and submits the trade for execution.
The expiry is just as important as the trade direction. It will not serve the trader any purpose to get the trade direction correct if the objective cannot be achieved within the set time limit. With the Call/Put trade, a late performance is a losing performance. The asset has to move in the chosen direction and do so within the time allotted to the trade.
Trade Example
Let us take the example of a trader named Juande, who has a bullish bias on crude oil and decides to buy a CALL binary option at 78.35, with a 1 hour expiry. For this trade to be a winner, the price of crude oil must be at least 78.36 or higher by the time the trade ends in an hour.
If the price of the asset is at 78.35 by the time the trade ends in an hour, the trade will end at breakeven and the trader’s investment amount is returned to his account.
If the price of the asset is below 78.35 in an hour’s time, the trade will end as a loss and Juande will lose his trade investment.
There is a modification of the Call/Put trade which is the 60 second trade. The 60 second trade is basically a highly speculative Call/Put trade type that has a compulsory expiry of 60 seconds.
Trading the Call/Put Option
The Call/Put option is purely based on the asset going up or down in price. This makes it amenable to being traded using indicators and expert advisors. It is possible to download a demo trading forex platform such as the MT4, create an indicator that works on such a platform to derive trading signals which can then be adapted to the binary options platform. Alternatively, a trader can purchase an existing indicator and adapt it to trade the Call/Put binary options contract.
When does it make sense to trade the CALL trade?
a) The decision can be made by technical analysis, and if the indicators all point towards a bullish outcome within the estimated time frame, then it would make sense to trade the CALL trade. Technical analysis can be made from indicators and from the charts (chart patterns and candlestick patterns).
b) If there is a news release for an asset that has a bullish outcome, then this can be used to trade the CALL option.
Conversely, it makes sense to trade the PUT option when:
a) There is a fundamental news release that has a bearish outcome for the asset.
b) A technical decision using technical indicators, bearish chart patterns or bearish reversal candlestick patterns is made from the chart information on the asset.
