Pair Binary Options Trading
So far, we have discussed some strategies that may be employed by new and experienced binary options traders alike. These strategies are used by traders constantly, and are
In this article we will discuss yet another commonly used binary options strategy used by traders. This strategy is called pair trading strategy. The pair strategy is a binary options technique used by traders to reduce the risks involved when trading. Many experienced traders seamlessly use this effective way to cut the amount of risk they encounter when entering a trade. But, many binary options traders can also attest that it is a good way to maximize profit and managing investments.
How Does Pair Trading Work
The mechanics of the strategy is where its name is derived. Binary options trades are done in pairs, where simultaneous or
There are three advantages to this strategy. We shall keep these in mind as we will be mentioning them when we cite examples of the use of this strategy. A binary options trader can use the pair strategy to:
- protect profits
- possibly double the income
- minimize the levels of risk
The pair trading strategy can be used in different kinds of assets: Forex, commodities, and stocks. The trades can be made on a single asset only, but can also be used in two competing assets. Depending on what type of asset the binary options trader is trading on, there are also two approaches to pair trading:
Single-Asset Pair Trading
Let us apply this type pair trading using a Forex example. Imagine a trader has just executed a new call binary option trade on the EUR/USD currency pair which expires in 60 minutes. He places a $1000 investment and the opening price is 1.3308. The payout ratio is 75% for
Now, 45 minutes into the trade, underlying asset price stands at 1.3365 and the trade is currently
The binary options trader then purchases a put binary option, again using the same asset that he is trading on. The trader must use the exact same parameters that was used for the original call trade. Expiry times should be the same and the amounts wagered should also be equal. By initializing a pair, the trader would have produced a new window of opportunity between 1.3308 and 1.3365. If the trade expires inside this area, then a maximum profit of $1500 ($750 + $750). We have just addressed the first two advantages of this strategy as stated above.
For the third advantage, the binary options trader would have also minimized his risk exposure with the second trade that he executed. If the price closes outside of the win zone, or the area bounded by the strike prices of the two trades, then a specific, but significantly lower loss results from the trade. From our example, if the trader did not make the second call, and the EUR/USD closes lower than 1.3308, then he loses $850 (he gets back 15% or $150 of the original $1000 investment).
But, because he executed the second trade, the loss is significantly dropped from $850, to just $100. Let’s see why. If the price closes higher than 1.3365, then the first trade finishes
Competitive Pair Trading
Competitive pair trading is also known as the Competitive Relative Value Trade strategy (CRVT). This kind of pair strategy was developed to take advantage of the price movements of two companies that not only operate in the same sector, but are in direct competition with each other. Some examples of companies that fall under this category include Apple/Samsung, Shell/Exxon, JPMorgan/Goldman Sachs, and others.
To put this strategy into context, let us take for example a binary options trader who learns about some a disappointing news release from Apple regarding a significant drop in their quarterly sales. This puts the trader in an inclination to trade against the stock. Now, he initiates a put option constructed on Apple’s imminent decline through the release, at a strike price of $467. The trader has chosen for the trade to expire in one hour and invested $1,000. Additionally, the payout ratio will be 75% if the trade finishes
Although the trader has placed the trade upon sufficient research, and with the backing of Apple’s announcement, the trade still carries a high risk. This is because the trader only stands to win $750 if the trade ends successfully, while he can lose up to $850 if the price moves against him. If the market is volatile, the trade could take unpredictable turns through its trade period. No matter how many years of experience a trader has, there is no guarantee that the trade will expire
With the competitive pair trading strategy, the trader can increase the odds in his favor by using effect made by the Apple announcement to a direct competitor. This part of the strategy now requires an
The advantages stated in the previous section are again addressed by executing the two trades. With the Apple and Samsung positions, risk exposure is reduced. If both trades end up correct, then the profit is doubled. The profit is also protected because one trade will always complement the other, making the trader safer in between their positions. Again, the risk exposure is $850 — $750 = $100, same as the previous example in the other pairing type. Similarly, this is far better than the risk of losing the original $850.
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