How to Trade Exotic Binary Options
Trading binary exotic options requires a keen understanding of option trading. It is a trading technique used by institutional investors that creates payoffs by being conditionally right or wrong about the direction of a trade but does not reward the absolute degree of correctness.
Other People Are Reading
Instructions
-
What are Binary Options?
-
1
If you trade standard options, you know that as the success of a trade increases so does its rewards. Success is defined by exceeding the strike price of an option and achieving dollar-for-dollar gains as it continues beyond the strike price. There is another class of rewards called "binary options." Suppose you successfully predict the low temperature for the day. You can only be right or wrong and you cannot (within reason) be more right once the temperature reaches the predicted low. You could be right several times in the same day however. In other words, you are always in a state of being right or wrong. It is a binary condition that rewarded you for being right. Trade to be right or wrong without a specific measure of correctness is the nature of trading a binary option.
If you create a reward for being right one or more times in a period, that is considered an exotic binary option. -
2
Consider how you can reward such an option. In standard options, you can be right and have a degree of rightness making you more or less right. A strike price of $60 when the stock price is $61 means you are in the money. A stock price of $63 means you are more in the money and a greater reward is measured. The use of "exotic" in exotic binary options refers to the nature of the payout. In the above example, the strike price is the threshold for payout. Any price at or above the threshold entitles you to a payout. Use risk and reward calculations and binomial progressions to see if you are fairly rewarded for a defined payout.
-
-
3
Trade exotic binary options when the success of the first option creates the opportunity for a free second option. Decide if the Canadian dollar will touch a $1.25 strike price when it is trading at $1.24. If this is a high probability event, the reward will be low. Look instead for a higher strike price that you believe will occur. This lesser probability will have a higher reward. Graph all strike prices by the exotic embedded-option value and choose the one with the best risk and reward possibilities. As a result, your money management decision as to how much to bet for any given trade will vary by strike price, not by stock price. This is a substantial difference from standard option pricing.
-
4
Learn other variations of exotic binary options trading. Options can be written so that once a strike is crossed, a new condition enters, such as the price may not drop below the strike one or more times. The permutations can be many and as varied as the contract is written. The mathematical skills needed to solve for market premiums increases with the conditions of the trade. Trades with multiple consequences are usually found in forex trading because forex is usually traded in pairs or combinations of pairs.
-
5
Trade exotic binary options only with great care and by understanding the mathematical construct of the option. Sometimes trades can be deconstructed into smaller trades once the initial condition is met or other standard options bought that remake the overall logic of the trade. It is difficult to specify an exact series of steps because exotic binary options are a customized product.
-
1
Tips & Warnings
Review probability, statistics and calculus before attempting to learn the exotic binary trading process.
These are options for institutional investor use, primarily. Be thoroughly competent in advanced options strategy before attempting to trade.
Resources
- Photo Credit www,sxc.gunnar3000
