Why Binary Forex Options are better than Spot Forex

For those who don’t know, Binary Forex Options are a type of option whereby every contract you buy pays out a $100. In a binary transaction you are pretty much betting against or for an outcome. For example, there maybe a binary contract that says the EUR/USD will close above 1.0824 at the end of the week. You would either sell this outcome (bet against it) or buy it (bet for it.) If you are right, then you win $100 per contract, and if you lose then you only lose only what you sold the contract for.

Ok, So let me explain to you why Binary Forex Options are better than Spot Forex:
A. This is most important, the reward to risk ratio on Binaries is FAR FAR superior than Sot Forex. You can buy your typical binary option for $20 per contract (and some you can buy for $5!) This means if you win, you gain 5X your investment, or what you risked! ($20 x 5 = $100) To do this on a Spot Forex Position you would have to travel into positive territory that is five times your stop loss! This rarely happens because the Forex market is like a whipping dragon, and it's hard to tell when a reversal is in progress. Most Spot Forex Traders that I know usually only have a take profit that is around the equivalent of their stop loss. This means that a lot of Spot Forex traders are only gaining what they risk.

B. You can’t get stopped out in Binary Forex Options. You’ll sleep better at night not having to worry about whether or not your position is going to get stopped out, despite the fact that price is ultimately going in the direction that you thought it was! (You can get timed out, of course, but when you consider there are WEEKLY Binary Forex Options, it's really not a problem.)


C. There is no sneaky broker problems like in Spot Forex. You don’t have to worry about requotes or widening spreads with Binary Forex Options. And you just don’t have to worry about stop hunting in general.

D. You can Hedge with a single account with Binaries Forex Options. And because your pay out is so much higher than what you invest/risk, hedging makes perfect sense with Binary Forex Options. Unlike Spot Forex, where the risk to reward ratio is relatively low. If you buy a binary contract for $25 and sell an opposing Binary contract for $25, the payout is $75 even after your losing side fails!


I have traded spot Forex for 3 years now, and I can tell you that it has mostly left me broke, mystified and frustrated. But with Binary Forex Options, for the first time in my trading career, I’m making profits while risking very little. With all that said…you still need experience trading spot Forex before you can successfully trade Binary Forex Options, imo.

Interesting post...!!

Perhaps, one day when you have time, you will elaborate a bit more as to where there is data and where these are traded etc......

Thanks

I have an account with Hedgestreet and IG Markets also offers Binary Forex Options.

IG Markets has an interesting Binary Forex Option called "Monthly One Touch." This means that if the price of a currency pair touches a strike ONLY ONCE, then you win the full $100 per contract.

I prefer Hedge Street because they have weekly Binaries, which basically start on Monday and expire on Friday.

There is also the possibility that you can use your Spot Forex Account as a Hedge against your Binary Forex account....but this doesn't make much sense when you consider that Spot Forex doesn't pay out as much as Binary Forex. You might as well just buy a Binary in the opposite direction.

As of today, I stopped trading Spot Forex. If I would have traded the news today, on Spot Forex, I would have gotten stopped out...because of the stop hunting before the price moved in the proper direction. BUt you know what? My binary position won today, because it can't get stopped out!

It doesn't make sense trading spot Forex, once you've tried Binary Forex Options.

If i undestand this broker allow you to buy and sell at the same time so you never have losing week?
Also you can make order near the end of the contract and have the same 4:1 win like make on monday?
Where is the trick?

That's assuming at least one strike is hit-- quite an assumption, no? It's basically a volatility play, unless I'm misunderstanding something.

If i undestand this broker allow you to buy and sell at the same time so you never have losing week?


It's possible that the price of a currency pair could fall in between your hedged strike prices. There is no such thing as a flawless trading instrument or system.

Also you can make order near the end of the contract and have the same 4:1 win like make on monday?

As the price of the currency pair becomes closer to the strike price, and as the time of the expiration of the contract approaches expiration, the contract becomes more expensive to buy. So no, you can't always buy with a 4:1 R&R. To get a 4:1 R&R you would have to buy a contract well before the expiration and you would have to buy a strike price that is further away from the current price.

Where is the trick?
There is no trick.


Head over to Hedgestreet.com and they have a PDF file that teaches you all about Binary Forex Options.

The only way you can lose both position is if the price of the pair falls in between both of your strike prices.

What is liquidity like in these markets?

I have seen single orders of $30,000 per trade in a single day, but my broker tells me that they are bringing in some huge banks into the fold.

You can order up to 50 contracts at once, and then you simply have to wait for the order board to refresh and you can simply order more.

I really don't know the size of the markets though, but for most of us retail traders it's good enough. Best to simply call up IG Markets or Hedge Street and ask them.

Are the greeks applicable to these types of options?

Reading the thread once again from your post no 6 it appaears time decay does affect these options.

Appreciate your post Yoda but the problem with simple option strategies are

1)you have to beat the market
2)In addition to this you have to beat the clock

And thats a very hard thing to do.

Besides its statistically proven 70% of all options expire worthless. (theres a reason for this which I won't get into) What does that tell you? It tells you the option writers are mostly the ones who win (in this case you IG markets). They know this thats why the sell you options and in my personal opinion buying an option with less than 30 days to expiry will almost guarantee you lose because of time decay. Time decay isn't proportional to time to expiry it actually accelerates as expiry approaches. So basically you have very little chance historically and statistically speaking if you're an option buyer and to add to that you're buying options with a week to expiry! This basically turns your chance into zero.

I'm talking about traditional options I'm not yet quite sure if the greeks come into play in the options you're talking about, but one things for sure you have much better chances being a writer than a buyer.

There are no greeks in Binary Forex Options. And yes, time does act as a stop loss for binaries (as well as a value indicator,) but there is no way that Hedgestreet could write binaries that work in their favor. Once you buy (or sell) a Binary with a set strike price, the contract has to be honored. If there ever was an instance when you didn't like the weekly lineup of binaries....then don't buy (or sell) them. And then there is no manipulation of the underlying security, in which case we are talking about the price of a currency pair, because the price hat Hedgestreet goes by will be very very very similiar to what your spot Forex account price's are.

The value of a binary contract is ALWAYS $100 dollars at the closing if the statement is true. Plain vanilla options (which is what you're basing your conclusion on) does not work in this manner.

Getting to the bottom of Binary Forex Options is like anything else....Demo trade first, then go in with a tiny bit of real money and then go in with your main trading money.

http://www.hedgestreet.com/pdf/building_blocks.pdf

Thanks for the reply Yoda

If you had suspicions regarding broker manipulation why didn't you trade currency futures or trade spot fx with an ECN

Sorry but I'm unable to see the logic in what you're saying if someone is not successful in getting the direction right (spot forex) what makes you think you're going to get the direction right and that too with the clock ticking away?

Personally I think those who are profitable in spot fx might want to take a look at this although its much harder in my opinion and for neophyte traders or those losing or breaking even in fx don't even think about it.

The only possible advantage I see in your binary fx options may be no broker manipulation but if thats what ur trying to overcome I'm inclined to think exchange regulated fx futures or spot fx with an ECN is a much simpler solutions.

Most ppl are attracted to options when the look at the very good reward to risk options and the small amount of money you have to pay to purchase an option (especially an out of money one) but its much harder than futures and spot.

Well thats just my opinion.

i think the best way to get a feel for this is to demo. I've seen this before on betting exchanges. For example at the start of the day you could bet on the dow going up or down for the day & the exchange would set a moneyline. As the day went on if it was obvious the dow was going up for the day the more you had to pay to get in on the action. RR was less in your favor but you had a big advantage. RR was good when you had to predict if it went up or down certain intervals.

I will check this out. Always want to start trading a different asset class since I'm profitable in Spot FX. I need new challenges.
Have to work out a good strategy though.

Yoda, thanks for bringing this 'option' of trading currencies to the attention of members here at Forex Factory. I will be doing some study on the subject this weekend. It never hurts to explore new ways to make money in the market.

Coach

I too trade binary options, but I have found that you need to be careful. If you enter a position and the contract closes against you by one pip, you lose the full amount of the binary. (If you bought, you lose whatever you paid, and if you sold you lose the difference between sell price and 100.)

As for replacing spot? To each his own.

I have had success at hedging spot positions. In fact, I like using options instead of stop orders.

siafx

An interesting Binary Forex Hedge idea is this:

Buy a Monthly One Touch Binary Forex Option from IG Markets.

Now take the equivalent investment and open up an opposite position
in your spot Forex account. Place a Stop loss for this Spot Forex position
at the strike price of your Monthly One Touch Position, and set
the take Profit X amount of pips away from the strike Price.

Now think of this.... You can easily buy 100 $8 Binary Monthly One
Touch contracts on IG Market'ss Monthly One Touch's. That's an $800
risk which is covered on your Spot Forex Position anyway.
The price touches your strike price, and the end of the month occurs...
Your $800 dollar investment is now worth $10,000.00 (12.5 x $8.00 = $100 pay out per contract. 12.5 x $800 is $10,000.) This type of risk to reward ratio can not be realized on a Spot Forex position.

*There is the possibility that the price could stall before the expiration date of the Binary, and then head back up in the predicted direction. Therefore leaving a double loss on both the Binary side and the Spot Forex side. Remember, NO trading is without risk.


Also, consider this: The high RR ratio in Binaries means that you don't need to trade as much as you do with Spot Forex. Therefore lessening your exposure to risk. Most Spot Forex traders are trading all the time, as they have to constantly make up for their past losses and their future losses to come. This constant exposure to the market is like a slow and silent death. If your average Binary contract is paying out 4x what you risked on it, this means that it would take four consecutive losses for you to lose all of your gains. Now take the conservative money management skills you learned in Spot Forex, risking only 3% of your account per trade, and your good. Therefore, a win on Monday means that you will never lose money for the entire week (as long as you stick to your MM discipline.)

BAD BINARY TRADING WEEK

Monday: $25 risk = $100 pay out.
Tuesday: $25 risk = -$25
Wednesday: $25 risk = -$25
Thursday: $25 risk = -$25
Friday: $25 risk = -$25


End of week profits for Bad Binary Trading week = $0


BAD SPOT FOREX TRADING WEEK


Monday: $25 risk = $50 gain IF Take Profit is twice your stop loss.
Tuesday: $25 risk = -$25
Wednesday: $25 risk = -$25
Thursday: $25 risk = -$25
Friday: $25 risk = -$25

End of week profits for Bad Spot Forex position = -$50.00