Make Money Using One-Touch Binary Options

Author: Hamish Category: Binary Options Articles Date: 9th May, 2012

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Make Money Using One Touch Binary Options

Traders are unique in that I have never come across two traders that see the market opportunities in the same light. Each trader views the market differently which, ultimately, creates the market. In this paper I expand on the use of two particular instruments, the one-touch call and put, to drive profits from a combination of two separate views, that of market direction AND market volatility.
The binary platform I use for trading this instrument is www.optionFair.com which offers one-touch calls and puts on a range of assets, my favourite being the Euro v $US. At present the rate is around the 1.3000 level, maybe this ‘big figure’ will spark a big move in one direction or another, but there is certainly likely to be some action at this level while the market decides whether it is now a support or resistance level.

Example

Say the trader decides that it is now a resistance level with any move above the level likely to be ‘sat on’, i.e. there is limited upside scope. How can the trader take advantage of this view? The answer is selling the upside one-touch call, which on optionFair provides a return of 77%. If the rate is 1.3000 the one-touch call level may be offered at 1.3001 over the next one hour. So by selling the 1.3001 one-touch call at a return of 77% means that so long as the rate does not get up to 1.3001 then for every $100 invested you get $177 back. This means that if you believe the market is now on a downward path, you are covered from ‘noise’, i.e. the small, short-term fluctuations that will take the market back up small amounts. In effect the seller of the one-touch call has a small buffer built in to their projection, the one-touch call seller is given a bit of leeway by the ‘house’, in this case optionFair.

Fixing the One-Touch Level

optionFair offer a 77% return on the Euro v $US touching AND not touching the level of 1.3001 so how do they work out what that level should be? The fact that it is 77% ‘touch’ or ‘no-touch’ means that they’ve worked out a level where they think there’s a 50:50 chance of either. How is this level calculated? What we know is that the price of a one-touch call is double that of the same strike and time to expiry European or vanilla binary call option. So if optionFair believe that there is a 50% chance of the Euro v $US touching 1.3001 then the price of the equivalent vanilla binary call would be 25, i.e. there is just a 25% chance of the Euro v $US rate being above 1.3001 at expiry. But there is a particular input into their calculation that can be challenged and that is their level of implied volatility. If optionFair believe the implied volatility too high then one should sell the one-touch call as the one-touch level will be set too high. On the other hand, if they have set it too low then one should buy the one-touch call since the chance of it touching are greater than 50%.

Trading the One-Touch Call & Put

If one has no real idea whether the rate is going to go up or down from 1.3000 but you believe it will be volatile one can buy the one-touch call and one-touch put but there is a particular risk to this trade. Buy buying $100 of each one has $200 at risk. If the market falls quickly and the lower barrier is hit one has returned $177 with a possible $23 still at risk from the exposure from the one-touch call. One has a choice of running the one-touch call and hoping that the underlying bounces back through 1.3000 and then travels higher to reach the upper level, where a further $177 is returned, or cash in immediately. As long as the return on the one-touch call remains above $23 one is still in profit and one is still in command. It is much easier to control the position from a winning standpoint than with one’s ‘back to the wall’.

Conclusion

Over and Under’s are not the only game in the binary options trading town. Those traders with a grasp of the volatility of the underlying can realistically take on the binary options platform, the ‘house’, by forming a better opinion of the market’s volatility. This is what options trading is all about, assessing volatility, and it applies just as well for binary options as conventional options. This judgement, aligned to the ability of assessing the market direction, can provide the perfect springboard to rewarding trading and profits.

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