Author : , Date : 22 July, 2016

Strategies for Buying PUT Options

With so many trade types that can be used in trading binary options, traders have the extra job of performing their analysis on their charts or platforms, determining the short term or long term outlook on the asset and then make the choice of the trade type to use to trade their preferred asset on their options platform.

Buying put options is one of the numerous trades that can be made in the binary options market. The binary options trader who decides to buy puts on an asset would normally do so when there is a bearish outlook on the asset or on the market where that asset is listed. Specifically, that trader’s put buying strategies would be used when the following is expected:

  1. When there is a fundamental trigger that brings a negative perception on the asset such as missed earnings estimates for a stock, or negative news for an economy e.g. the effect the Brexit vote outcome has had on the British Pound since June 24, 2016.
  2. When there is a systemic collapse of the market or of the sector in the market where the asset was listed. A good example was when the collapse of Lehman Brothers in 2008 triggered the global financial crisis, which led to the collapse of most of the world’s stock markets.
  3. Sharply reduced global demand on a commodity. An example is the collapse in copper prices that were seen in 2006 and 2007, the collapse of oil prices in 1998, early 2009 and 2014.
  4. PUT buying can also be done to take advantage of a technically bearish setup on the charts when there is little fundamental influence in the market.

These are all situations that occur in the markets at one time or the other. Therefore, it is essential to understand how to buy PUTs in the binary options platform when the time comes to do so.

PUT Trading During Market-Negative News

The following put buying strategies are employed in the binary options market:

  1. Buying PUT options in response to market-moving news.
  2. Technical PUT option-buying strategies.

It is noteworthy that unlike in traditional options trading, it is not possible to use binary options to hedge trades. All binary options trades are therefore essentially naked. That is why it is essential to use loss protection or the cashback function whenever trading a binary option.

 

How to Trade the News with Put Options

If you are trading the news based on a high volatility market event, then you need to tread with caution when trading. Now when it comes to the news, there is the regular high-impact and middle-impact news releases which are scheduled on an economic calendar. Then there are the super-high impact news releases which are not scheduled, but come up once in a while and cause hefty volatility in the markets.

It is not a good idea to try to trade news items straight out of the release. Markets tend to react in a knee jerk fashion to high impact news releases, and the initial response may not even be the final direction of the trade. Even when the market response is in the direction that is appropriate for such news releases, the movements that will be seen will be too rapid and disjointed to enable the binary options trader effect the appropriate trade.

In this article, we are concerned about PUT trades, and it needs to be mentioned that when markets fall, the range of price movement is usually more than is seen with bullish price reactions. The most appropriate way to trade a PUT strategy based on a negative news outcome for the asset is to wait for markets to settle down before entering any trades. The reason why this should be done is because after the initial response to the news by market players, calmer heads eventually prevail and market players do some more in-depth analysis of the news. As trading houses and institutional players assimilate the news impact and form a market bias, they will start to rearrange their positions and the market will begin to move accordingly. A clear example of this is the impact that the recently concluded Brexit vote had on the financial markets and more specifically, on the British Pound. The British Pound fell heavily against the major global currencies after the Brexit camp won the referendum.

The fall of the British Pound is an opportunity which could have been exploited as a PUT option trade. Many traders made a lot of money from this trade. But not everyone who traded the Put option made money. This is because any ill-timed Put trades would have actually lost money. How could this have happened?

The Scenario

Once it emerged that the Brexit camp would win the referendum, the British Pound began a steep fall. The news emerged late in the New York session. This means that the Asian session was yet to wake up to the news, and the London session would also have to react to the news. Those mostly reacting were traders in the New York session.

As a binary options retail trader, it is actually difficult to catch these news spikes as they happen. Therefore, the immediate aftermath of such news would not be to the advantage of the trader. A Put option trader would therefore not try to catch the initial spike. Many broker platforms would be overwhelmed with orders and will be unable to give you good fills. Besides, a trade could easily be taken out by the fast-moving retracement and re-entries that occur within the first thirty minutes of such trades.

A better approach is to wait for the dust to settle. This is the timeline for making your PUT trading approach.

Phase 1

  • 1st 30 Minutes: The market will run haywire, moving in a spike towards the direction of the news trade before retracements and further entries occur. This occurs at a fast pace and therefore any news trading within the first thirty minutes should be avoided.

2nd 30 Minutes Up to 5 Hours Post-News Release: The market will tend to slow down and make a retracement. This is the time that the big-time traders pause to understand the news in its entirety before making fresh moves. If you look at the charts of the GBPUSD when the Brexit vote was released on Friday June 24, 2016, you can see this on the charts.

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What Next?

Phase 2

The next stage is what separates the big boys in trading from the market Lilliputians. In this global village we call our world, information travels fast and affects everyone everywhere. A release of high-impact market news that occurs in one trading time zone will pick up steam when the other time zones wake up. Using the Brexit as an example, the news of the success of the Brexit camp hit the markets as the New York time zone was winding down and caused heavy market volatility. By the time the Asian zone woke up, volatility picked up again.

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You must time your trades so that you catch the renewed volatility that starts to occur in the next time zone. You will find several opportunities to trade without experiencing the difficulties of the initial spike seen in the immediate aftermath of a news release.

Phase 3

The news impact is likely going to be felt for days. So you watch for the trend of the asset you want to trade according to the direction of the news, and look for opportunities to sell on rallies.

 

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By the time the dust finally settles, you would have made a lot of pips from several PUT trades. This is how you should implement your PUT buying strategies for news trades.

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