There are different types of binary options available. Each type of binary options has its own advantages and disadvantages, and not all trading strategies are suitable for all options. In this article, we will discuss these types of binary options and the associated strategies.
Three types of binary options
'Higher/lower' options are binary options for which you have to predict whether the price at the expiration date is higher or lower than the current price. It doesn't matter what the price does in the meantime. If the price at the time of expiration is at least one pip (or tick) higher (in the case of a call option) than at the time of purchase, you collect the premium on the option.
'Touch/no touch' options are binary options that need to reach a certain price before the expiration date. It doesn't matter what the price is at the time of expiration. It is only important if a given value is touched between the time of purchase and the time of expiration. If you predict this correctly, the option pays out its return.
'Boundary' options (also called 'in/out' options) are types of options for which you must predict whether the price at the expiration date will fall within or outside of a certain bandwidth. If you make the prediction correctly, the options pays out.
Different strategies for different options
Not all binary options trading strategies are suitable for all types. Below we identify an interesting strategy for each type of option.
Higher/lower strategy. Higher/lower options are the simplest type of binary options. You buy these options if you have a clear view that the price of a stock (or other underlying asset) will go up or down in the short term. A way to use it is to follow the trend. That is, if a particular upward or downward trend seems to be emerging in the price chart, you buy an option that fits this trend (ie 'call' for an upward trend, and 'put' a downward trend). p>
Trend followers in the 'normal' stock options market have often been criticised because they are mostly too late with their time of entry, and thus miss out on the profits. But with binary options, it doesn't matter how much of the trend you observe. If the price moves in the right direction even with one tick, you make a profit.
Boundary strategy. With a boundary option, it does not matter whether the price goes up or down, but only if it falls inside or outside the bandwidth. A good strategy for boundary options is to buy an 'out' option just before an important news story is published. Following the publication of such a news fact, the price often shakes violently, and there is a high probability that it falls outside of the boundary. For example: Apple will make its quarterly figures public in 50 minutes. At that moment you can buy a nice boundary 'out' option on the Apple share with expiration in 60 minutes.
One touch strategy. 'Touch/no touch' or 'one touch' are probably the most difficult types of binary options to trade. You must predict whether or not a certain value is going to be reached (which is much more difficult than just predict whether the price goes up or down). The best way to use these options is to take a relatively long time (for example, a day, or a week), and to choose the option in such a way that its strike price is near a major technical level (for example, a support or resistance level, or a pivot point). Such levels tend to impact the direction in which the market moves.
Conversely, you can also just buy a 'no touch' option if the strike price is beyond a support or resistance level. For example: today's value of the GBP/USD is 1.3110 and there is a support level at 1.3000. That means that the price will not easily fall below 1.3000. If there is a 'no touch' option with a strike price of 1.2900 for sale, then you have got a good opportunity: this value is indeed beyond the support level and is unlikely to be reached.
NOTE! If you buy a 'touch' option, you would like the duration to be as long as possible. That gives you as much chance as possible to hit the strike price before the option expires. With a 'no touch' option you instead want the shortest duration possible. Every minute that the option runs longer, is an extra chance to reach the strike price (and lose your investment).