Author : , Date : 5 September, 2016

Trade Types in Binary Options: Pair and Ladder Options

In this article, we will introduce two other types of binary options which are less well known but are equally important: the pair options and the ladder option.
Pair Options
Many traders have wondered what pair options trading is all about. Well, the word “pair” may give a clue to the fact that it involves two equities or two investment instruments. But pair trading as a whole is still a gray concept for many traders. This article will split the grey into black and white for you to understand.
Pair option trading essentially involves betting on the performance of a pair of stocks, currencies, indices or commodities which are listed in the same market sectors on their parent exchanges, or whose businesses are in competition with each other because they offer the same kind of products. The trader is betting that one underlying asset in the pair will outperform the other asset in the same pair within a given time frame. If the trader gets his prediction right and his chosen asset outperforms the other, he makes money. Bet on the wrong asset and the trade ends up a loser. Examples of assets which qualify to be traded as pair options include:
a) Google vs Apple (they are both smartphone makers)
b) Google vs Microsoft (they both offer software and technology products)
c) Apple vs Microsoft
d) Total vs BP (both involved in crude oil upstream operations)
e) Alcatel vs Deutsch Telkom (both are telecoms companies)
f) Pfizer vs Glaxo (both are pharmaceutical companies).
There are other examples and your broker will list the appropriate pairs on the trading platform.
Binary options trades always have an expiration date. In placing the pair options trade, the trader has to target a particular rate of return prior to placing the trade. This is essential so that the proper risk management strategy is applied. This brings us to the concept of fixed pair options and floating pair options. Floating pair options give the trader the choice of closing the trade manually before the expiration of the option, allowing the trader to potentially lock in any profits made. Fixed pair options do not provide this option, so the trader has to wait for the options trade to expire before cashing out a profitable position. Rates of return are generally higher for floating pair options than for fixed pair options.
Now that we have some idea of how pair options trading works, the question is: how are pair options traded? Let us take an example using the stocks of Apple and Microsoft. Let’s assume for the purpose of this example, that the trader commits $500 to the trade, with a payout percentage of 40%.
Let’s assume the trader places a pair option trade that bets on Apple stock outperforming that of Microsoft by the end of the month, and the trade is taken with half the initial investment, $500. If indeed at the end of the month, Apple outperforms Microsoft, then the trader will get a payout of $700 (his initial $500 + 40% of 500 = $200). If he used a fixed pair options trade, he has to wait for the expiry of the option, which is one month, to cash out his trade, assuming Apple outperformed Microsoft stock at the option expiration. With a floating pair options strategy, he can decide to sell back the option to the broker before the month runs out if the Apple stock is outperforming Microsoft at the time he decides to sell. If Microsoft ends up outperforming Apple, the trader loses his $500 investment.
The above example is a bit simplified. In live pair options trading with real money, other parameters will come into play to eliminate guesswork and ensure a greater degree of success in trading.
Ladder Option
The Ladder option is a complex binary option trade type which involves several strike prices and several payouts. A portion of the payout is paid to the trader if a particular strike price is attained by dynamic price action. In other words, up to 5 strike prices are set for the Ladder trade, just like the steps of a ladder. As each strike price is attained by the price action, a payout milestone is achieved. Therefore it is possible for the trader to get all the payout milestones, just a few or none at all, depending on how the price moves in the market.
The Ladder option can be made simple if you know the strategy to use in trading it. A careful analysis of the ladder trade shows that it is based on price action. One way of trading price action is by using range trading techniques such as the pivot point strategy or channel trading strategy. In this piece, we will focus on the pivot point strategy.
Trading the ladder with pivot points requires things:
1) You need access to an interactive chart, which can be obtained from an online trading platform of a broker that offers the asset you want to trade.
2) You need a pivot point calculator. A candlestick chart would do for our analysis. You can then search the internet to get a free pivot point calculator. Attach it to the chart and you will the pivot points as shown below:
The next step is to use the pivot points as a guide to the price behaviour of the asset. Price will either stall and reverse, or stall and proceed at pivot points. In setting the price levels of your ladder trade, use the pivot points as benchmarks. As the price moves around during normal trade activity, you can use the behaviour of price action at the pivot points to determine which of the strike prices listed by the broker for the trade will be attained. This will require significant practice to perfect and traders are urged to use the Deray Options demo platform to practice this trade type to perfection.
The beauty of the Ladder trade is that the total payout for this trade type is very high and surpasses that of the regular trades. How much of it you get depends on how many strike prices are attained.

Facebooktwitter

Add Comment

Required fields are marked *. Your email address will not be published.