Binary Option Strategies
An Introduction to Binary Option Strategies
The majority of binary option strategies analysed and discussed will consist of combinations of binary options. Binary option strategies (or for that matter conventional options strategies) consist of outright calls and puts, or combinations of both. The possible combinations double in number when the outright calls and puts are divided into a further two categories of options, European and American. The kaleidoscope of potential strategies is further expanded when barrier options, such as Knock-Outs and Knock-Ins, additionally contribute to the list. Variable strikes, expiries, barriers etc. create a limitless array of potential strategies, and then to cap it all, one can combine binary options with conventional options just to make it really interesting!
Conventional Options Strategies & Binary Option Strategies
In the mature conventional options market probably in excess of 80% of all trades consist of combinations of calls and puts such as call spreads, put spreads, straddles, strangles, butterflies, condors etc.. There is no reason to believe that as the binary option market matures binary option strategies consisting of combinations of different binary options will similarly predominate the volumes traded. When including barrier options in binary option strategies the percentage of binary options strategies volume to total volume is likely to rise from the 80% level as these particular forms of binary options do not have natural equivalents in the conventional options marketplace.
Table of Binary Options Strategies
European & American Binary Options
In general there are two distinct forms of binary options and these are:
1. options that can be exercised prior to expiry and at expiry
2. options that can only be exercised at expiry.
Options that can only be exercised at or after expiry are termed European options, while the options that can be exercised prior to and after expiry are termed American options. And the nomenclature is clearly geographically totally irrelevant and meaningless! Generally American options refer to ‘One-Touch Calls’, 'One-Touch Puts' or ‘Double No Touch’ options. A barrier option that does not have a Knock-in or Knock-out feature can be considered as the simplest of ‘one-touch’/’no-touch’ binary options strategies. Zero interest rates are assumed throughout the analysis unless otherwise stated.
The terminology generally within the global options community differs not only from one geographical location to another, e.g. on trading on LIFFE a long call with two short calls is a ladder, on the SFE it is a Christmas tree, but also differs from one product to another, e.g. time to expiry in the FX market is tenor.
‘Calls’ will be interchangeable with ‘upbets’, ‘Puts’ with ‘Downbets’. ‘Tunnel’ will generally be used in preference to ‘Corridor’ or ‘Rangebet’. A ‘Knock-Out’ strategy gets knocked out at the ‘barrier’ while the ‘strike’ within a ‘Knock-Out’ strategy determines the level against which the bet ultimately wins or loses.
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