Types of Binary Options Trades: The Ladder trade
IG Markets introduced the Ladder trade as another type of binary options contracts that can be traded in the market.
By definition, a Ladder binary option is an option that has a set of prices arranged sequentially like the rungs of a ladder, and in which it is possible to lock-in profits once the asset has reached a pre-determined price or prices, and therefore ensuring that the trader is able to retain some profit from the trade irrespective of whether the asset falls below these levels before the options contract expires.
In other words, the trader is presented with a set of prices, which are arranged sequentially one after the other like the rungs of a ladder, and the trader can then use these several price targets in such a way that if one target is reached before expiry, the trader profits from it and the total profit for the trade is a function of how many price targets are reached. Even when the asset has hit only one price target, the trader profits to some extent from the trade.
The price levels are arranged just like the rungs of a ladder. As the asset “climbs the rungs” of the ladder, money is made. The only time the trader fails to make money is when the asset price has remained unchanged or when the change has not been enough to hit even one price target.
Components of a Ladder Trade
a) The ladder trade can work on both the call and put direction. We will give an illustration of this below.
b) In a ladder trade, there are several price targets, and one single strike price. The ladder option functions as an exotic option that features several price levels that may be located above (for a call ladder) or below (for a put ladder) the strike price.
How It Works
The trader profits according to which of the higher (call ladder option) or lower (put ladder option) of the ladder rungs (price levels) is reached by the asset before the option contract expires.
Let us illustrate the ladder option with two examples.
Example A
On December 1st, our trader Juande purchases a call ladder option on stock NYX with a strike price of $50, with additional price levels set at $60, $75, and $95, with a 30day expiration date. On Decmber 10th, stock NYX reaches $80 but declined to $55 by expiry date. What would be Juande’s payout?
Juande would receive payouts for the stock NYX reaching both the $50 and $75 price targets. He however missed out on the $90 price target. Also note that if the price of the asset had dropped below $50 and never recovered, the trade would have been out of the money.
Example B
With the EURUSD trading at 1.3089, Juande decides to perform a put ladder trade with three price levels: 1.2950, 1.2870 and 1.2830. The asset price targets are arrayed as follows:
- EURUSD must be below 1.2950 (20% payout)
- EURUSD must be below 1.2870 (30% payout)
- EURUSD must be below 1.2830 (50% payout)
Results
- To get a 20% payout, the EURUSD must close BELOW 1.2750.
- To get an extra 30% payout, the EURUSD must close below 1.2870
- To get the final 50% payout, the EURUSD must close below 1.2830.
If for instance the EURUSD closed below 1.2750, but then started rising again and never came down until the expiry of the trade, Juande will still be assured of the 20% payout he got from the first price target.
A good way of setting price targets is by using the automatic pivot points calculator. This will give the trader 2 price levels of support and resistance, and one daily pivot. Depending on the bias for the day, the trader can use the daily pivot and two out of the first two resistance or support points as the price targets. The expiry can be set to 24 or 48 hours and the trade played accordingly.
All trades must be practiced using a demo account and an MT4 chart for guidance. All assets in the binary options market can be traded with the ladder strategy, but the trade will work best on assets that trend very well and have a wide intraday range of moveme
