Anyone who has ever invested or traded for any length of time will know that market conditions can vary. Sometimes there are established bull or bear market trends where prices will rise or fall in a reasonably consistent manner for a long period. In these conditions, trading is relatively easy because you generally know the way that prices will move. You simply follow the trend, making call options in a bull market and put options in a bear market until things change.
All too often, however, the markets will be unpredictable and prices will change wildly in different directions. These are often seen as dangerous times for all investors because making the wrong decisions can result in large losses. But for binary options traders, unpredictable market conditions can often be seen as an opportunity to make profits, which are possible whether prices are rising or falling.
Trading binary options does have several advantages when there are unpredictable market movements. One is that you are not buying assets and so can limit your potential losses by staking relatively small amounts. Another is the diversity of assets you can trade because, even when market movements in general are unpredictable, certain commodities may have an established trend or particular exchange rates may be moving in a specified direction.
It’s really a question of identifying the relevant asset and predicting the price movements correctly. So when market movements are unpredictable, undertaking thorough research is even more important that when markets have an established pattern. You really do need to be alert and pay attention to detail. It’s also important that you adopt a flexible approach; conditions can change quickly and you need to be ready to change your trading strategy accordingly. In unpredictable markets, for example, trading range options may be more appropriate than the more common above and below options because you don’t have to predict the direction of the movement.
Example of an Unpredictable Market Movements Trade
ABC Inc is due to give a press conference where it is expected to make an announcement in connection with a proposed takeover by another company. You believe this will indicate the takeover is moving forward and will cause the stock price of ABC Inc to rise. However, you’re not sure of this and suspect there is a possibility the planned acquisition may have hit problems, which will cause the price to fall.
Because you’re uncertain, you place a call option for $1000 and a put option for the same amount. When the announcement is eventually made, you learn the takeover is going ahead and the call option is likely to finish in the money. You therefore use a Close Now option on the put option, which enables you to recover $250 of the original stake and make a loss of $750. However, the call option has an 80% payout so you receive a total of $1800 on that including your returned stake, making an overall profit of $50.