Volatile markets generally pose a risk for investors because prices can move quickly and unpredictably, possibly resulting in large losses. However, binary options traders often see a volatile market as an opportunity because it increases the chances of making profits. Unlike many other forms of investment, binary options allow you to profit when prices fall as well as when they rise, so you’ve got two ways to win. Additionally, because you’re not actually buying and selling the assets, only staking an amount on a prediction, you’re not risking large amounts of money.
The simplest form of binary options trading is where you predict that the price of an asset will be higher or lower at a set time. However, when markets are volatile, this form of trading may not be the most appropriate and range volatility trading may be more suitable. Here you are predicting how a price will finish at the expiration time in relation to a set price range:
- if you believe the price of an asset will be relatively stable during the period, purchase an ‘in’ option to predict it will remain within the range
- if you’re forecasting a volatile price, buy an ‘out’ option in the expectation that the price will go above the top level or below the bottom level in the range.
Predicting the Range
An advantage this type of trading has over the more common above or below prediction is that you don’t have to work out which way the price will move. You can finish in the money for an ‘in’ option whether it moves up or down as long as it remains within the range. Equally, an ‘out’ trade will be a winner as long as the price moves outside the range, whichever direction it happens to move.
In a volatile market, you can hedge your bets by placing both a call and a put trade. This may occur if you place one and then have doubts about the way the price is going to move. Making an opposite trade will then ensure that at least one finishes in the money and you’ll minimize your losses.
Trading in a volatile market makes it even more important that you research thoroughly so that your predictions are more likely to be accurate. Stay alert to everything that is happening because the situation can change very quickly and affect the way prices will move.
Example of a Range Volatility Trade
The share price of XYZ Inc is currently at $1.20 but has been fluctuating between $1.00 and $1.50. If you think it has now settled down, you may purchase an ‘in’ option for $1000 to get a total return of $1800 if you correctly predict it will stay within a $1.15-1.25 range.
Alternatively, if you think the stock is still volatile, purchase an ‘out’ option to win the same amount if the price goes outside that range by the expiration time.