Hi I am a newbie to this forum and to binary options.
I know this uses GOLD rather than a currency pair, but this is not important for the question and it still applies to forex binary option trading..
I have read about "Binary fence trading"
and I have come across the following
You believe that the price of Gold will go up in the next hour. Trading on a Above / Below binary option, you decide to buy a Call option at a strike price of 1120. The market goes up as you expected and the price of Gold is currently at 1160. However, after a few minutes you start to think that the price of Gold is going to go back down. In order to cover both outcomes, you buy a second option, on Put, at the current rate of 1160. This way if Gold expires with a price between 1120 and 1160, you will win both of the options.
Scenario 1:
If you had invested $1,000 on Call and $1,000 on Put (Total: $2000), you would receive up to $3,600 (with an 80% payout), realizing a $1,600 profit ($1,600 = $3,600 less $2,000 of the investment).
Scenario 2:
You can also win one contract and loose the other, cutting their losses. For example, if Gold expired higher than 1160 than you would win the “Call” and loose the “Put”. On the other hand, if Gold expires lower than 1120, you will win the “Put” and loose the “Call”.
Scenario 3:
In the worst case scenario, you will have invested $2,000 and get only $1,800, loosing $200 (10% of their initial investment).
Scenario “Call” Payout “Put” Payout Total Payout P&L
SET above 1160 $1,800 - $1,850 -$200
SET between 1120 and 1160 $1,800 $1,800 $3,600 $1,600
SET below 1120 - $1,750 $1,850 -$200
Using this strategy, a trader can trade up to eight times and be out-of-the-money seven times and still cover their losses and make a profit from one win.
7 X ($200) + 1 * 1,600 = $200
= The person that wrote this is claiming there are only three scenarios....
MY question is, that surely there is a fourth scenario when trying to use this method?
ie that the first trade you place , in the case of the example above a "buy a Call option at a strike price of $1120." It then goes onto say that the price goes upwards as expected... BUT what happens if soon after the Call option is bought, the price goes against you, and you are "not in the money" then any following trade, ie if you purchased a call again at say $1115 and the price continued to go south, you would be out of the money big time, or likewise if you purchased a put at say $1115 but the price rose to say $1118, then you would be out of the money big time also...
With BIG losses?
Is there anyway to protect yourself against the first option not going as expected.
ps as a side question, can anyone reccomend a good and respctable online binary option broker?
Thank you for your time.
I know this uses GOLD rather than a currency pair, but this is not important for the question and it still applies to forex binary option trading..
I have read about "Binary fence trading"
and I have come across the following
You believe that the price of Gold will go up in the next hour. Trading on a Above / Below binary option, you decide to buy a Call option at a strike price of 1120. The market goes up as you expected and the price of Gold is currently at 1160. However, after a few minutes you start to think that the price of Gold is going to go back down. In order to cover both outcomes, you buy a second option, on Put, at the current rate of 1160. This way if Gold expires with a price between 1120 and 1160, you will win both of the options.
Scenario 1:
If you had invested $1,000 on Call and $1,000 on Put (Total: $2000), you would receive up to $3,600 (with an 80% payout), realizing a $1,600 profit ($1,600 = $3,600 less $2,000 of the investment).
Scenario 2:
You can also win one contract and loose the other, cutting their losses. For example, if Gold expired higher than 1160 than you would win the “Call” and loose the “Put”. On the other hand, if Gold expires lower than 1120, you will win the “Put” and loose the “Call”.
Scenario 3:
In the worst case scenario, you will have invested $2,000 and get only $1,800, loosing $200 (10% of their initial investment).
Scenario “Call” Payout “Put” Payout Total Payout P&L
SET above 1160 $1,800 - $1,850 -$200
SET between 1120 and 1160 $1,800 $1,800 $3,600 $1,600
SET below 1120 - $1,750 $1,850 -$200
Using this strategy, a trader can trade up to eight times and be out-of-the-money seven times and still cover their losses and make a profit from one win.
7 X ($200) + 1 * 1,600 = $200
= The person that wrote this is claiming there are only three scenarios....
MY question is, that surely there is a fourth scenario when trying to use this method?
ie that the first trade you place , in the case of the example above a "buy a Call option at a strike price of $1120." It then goes onto say that the price goes upwards as expected... BUT what happens if soon after the Call option is bought, the price goes against you, and you are "not in the money" then any following trade, ie if you purchased a call again at say $1115 and the price continued to go south, you would be out of the money big time, or likewise if you purchased a put at say $1115 but the price rose to say $1118, then you would be out of the money big time also...
With BIG losses?
Is there anyway to protect yourself against the first option not going as expected.
ps as a side question, can anyone reccomend a good and respctable online binary option broker?
Thank you for your time.
.
