The Bull Spread Binary Options Strategy

After acquiring a solid foundation of the basics and terminology used in binary options, the next thing you should know and master are the that will help you increase your profits as well as reduce your risk exposure for each trade. Essentially, to make it in binary options trading, you need to have techniques that will successfully allow you to analyze the market conditions of the underlying assets of binary options. You will soon find out that most strategies utilize a combination of technical and fundamental aspects that are organized to achieve your goal. These techniques can help evaluate factors such as the direction and volatility of price.

At first, we arbitrarily select a binary option without any basis. But again, in order to achieve optimal profits, and to select a binary option proficiently, you need to choose a binary options strategy that must be based primarily on how you want binary options to function for you. Later when you become advanced, you will discover that a binary option trading strategy will only be successful for you if you can utilize it in a way that will let you achieve your investment objectives. For example, you could take advantage of the flexibility of options in order to support your planned speculation portfolio in numerous ways.

Consequently, you will find that it is worth your time to detail your financial plans. You also need to list your major intentions. By doing so, you will filter the number of strategies that may be ideal to you just because only a few of them will be really able to satisfy and achieve your objectives. There are a number of binary options strategies that can be used with this intention in mind. They should be able to help you improve your trading results under a number of different market conditions.

The Bull Spread

In trading, a bull spread option strategy is used by a binary options trader who is looking to profit from an expected rise in the price of an underlying asset. This strategy is employed when the binary options trader expects the underlying asset price to move upwards. A vertical bull spread is a vertical spread where options with a lower striking price are purchased and options with a higher striking price sold. Depending on whether puts or calls are used, the vertical bull spread can be established with a credit or a debit.

Bull Strategy

A binary options trader will require such a strategy if he determines that the price of an underlying asset of the binary option is rising in value. You should then activate a ‘Call’ binary option under these circumstances. An example is stated below.

For this case, let us say that you have news, insider information, or information from your technical analysis that indicates that gold is very likely to increase from its current value of $1,287.00 over the short term. Let’s say that you are also aware that you will be entitled to a 78% profit if you open a ‘call’ binary option using gold as your underlying asset. In addition, you also precisely know your risk exposure because if you finish out-of-the-money, you will receive a rebate between 10% and 15%.

Next, choose to deposit an investment of $1000 and opt for an expiry time of 30 minutes. Then simply wait for your information to take its effect and watch the price of gold increase if your information is good. These are all the decisions that you need to make for the bull strategy. When your expiry time expires and if the price of oil is just $1 higher than your opening or strike value, you will earn a profit of $780 in just 30 minutes.

The profit is a great and quick return for what appears to be little risk exposure and minimum effort. However, as with any investment decision, you must ensure that you fully understand your objectives and risks before activating any new trades. In this respect, your goals and risks are well-defined as compared to other investment types. Despite all benefits of trading using binary options, you should always work and adhere to a well-developed trading strategy.

In the bull spread strategy, it is necessary to assess how high the stock price can go and the time frame in which the rally will occur in order to select the optimal trading strategy. Most bull spread strategies utilizes the simple call buying strategy shown in the example above, and is used by most novice options traders.

Asset prices seldom go up by leaps and bounds. Usually, those who use the bull spread binary options strategy usually set a target price for the bull run and utilize bull spreads to reduce cost. This however, does not reduce risk because the options that end up out-of-the-money can still expire worthless, or 10–15% depending on the binary options broker. While maximum profit is capped for these strategies, they usually cost less to employ for a given nominal amount of exposure.

Moderately Bullish Binary Options Strategy

There are also mildly bullish binary options strategies. The bull call spread and the bull put spread are common examples of moderately bullish strategies. Mildly bullish trading strategies are options strategies that make money as long as the underlying asset price does not go down by the option’s expiration. These strategies may provide a small downside protection as well. Predicting out-of-the-money covered calls is a good example of such a strategy.

The Bull Call Spread

The bull call spread option trading strategy is used by a binary options trader when he thinks that the price of an underlying asset will go up moderately in the near future. Bull call spreads can be implemented by buying an in-the-money call option while simultaneously writing a higher striking out-of-the-money call option of the same underlying security and the same expiration time.

By shorting the out-of-the-money call, the options trader reduces the cost of establishing the bullish position but forgoes the chance of making a large profit in the event that the underlying asset price skyrockets. The bull call spread option strategy is also known as the bull call debit spread as a debit is taken upon entering the trade.

The success of the bull call spread naturally depends on the accuracy of the investor’s view of how the share price will move, on the strike price of the two options and on the difference in price between the options. The investor should therefore do adequate research on the likely movement in the share price, taking into account factors that may influence the whole market and the extent to which movements in the individual share price normally correspond to those of the whole market. The investor should go into this strategy with a clear idea of the maximum downside risk and the maximum potential profit, and the details of the option contracts should be clear. Professional advice should be taken if necessary when determining the suitable strike price and expiry date of the two options.

The Bull Put Spread

The bull put spread option trading strategy is used by a binary options trader when he thinks that the price of the underlying asset will go up moderately in the near future. The bull put spread options strategy is also known as the bull put credit spread simply because a credit is received upon entering the trade. Bull put spreads can be implemented by selling a higher striking in-the-money put option and buying a lower striking out-of-the-money put option on the same underlying stock with the same expiration date. You can say that the bull put spread is the opposite of the bull call spread.

For example, if a binary options trader has information that an XYZ stock trading at $45 is going to rally soon, he enters a bull put spread by buying a put for $100 and selling a put for $300. Therefore, the trader receives a net credit of $200 when entering the spread position. If the stock price of XYZ begins to rise and closes at $50 on expiration date, then both options expire worthless but the binary options trader keeps the entire credit of $200 as profit, which is also the maximum profit possible.

But if the price of XYZ had declined to $40 instead, both options expire in-the-money with the buy having an intrinsic value of $200 and the sell having an intrinsic value of $700. This means that the spread is now worth $500 at expiration. Since the binary options trader had received a credit of $200 when he entered the spread, his net loss comes to $300. This is also his maximum possible loss.

Try practicing the bull spread binary options strategy on the demo account of one the best brokers listed on our site!

Read more articles on Education, Strategy.

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