Many of the advantages of binary options (when compared to other trading instruments) are widely known. These generally center on the limited possibility for trading risks as well as the fact that potential gains and losses are clearly understood before a trade is placed. But one commonly cited disadvantage is the fact that you will not know if your trade is a success or failure until the contract actually expires. It is entirely possible that when trading you can see a trade move into the money near initiation, only to see prices reverse and finish “out of the money” when the trade expires. Read more to learn itm and otm meaning finance. This is one of the biggest problems traders face when dealing with Binary options.
To offer a remedy for this, the best binary options brokers have started to alter their approaches and diverge from setting fixed odds, which was the common practice for years. We have seen in IQ option review and Binary.com review that this now on offer. Instead, many brokers now offer more flexible (variable) trading odds for active market positions. Specifically, this means that trades can be closed before their expiration times and here we will look at some situations where traders can use this flexibility to its advantage. You can see these odds at 24option review and other Tech Financial white labels.
Capturing Gains After a News Release
Let’s assume that we are in a bullish position in the S&P 500, with out CALL option expiring in one month. The trade is looking good, with prices rising 3% since its initiation. At the 3-week point (1 week until the option expires), a major economic release, the US Non Farm Payrolls, is made available to the public. This number shows that the labor market in the US is much weaker than analysts had previously expected, and this is not a positive scenario for the S&P 500 going forward.
Of course, this puts our trade (and our gains) in jeopardy, and we will need to take action to protect the position. To do this, we can use our variable option to close the position early before the market decides to put in major orders to sell the S&P 500. Since markets move very quickly after news releases, we will probably not be able to capture all of the 3% gain seen previously.
Nonetheless, we can close the trade and likely capture gains of 2.5%, which is not bad for a day’s work. Without the variable option, there is a strong possibility that the S&P could encounter a massive sell-off and even result in losses for the trade. Luckily, the offerings of variable options help prevent this from happening.
Cutting Losses After a Technical Breakdown
The other main use for variable options is to prevent additional losses and close a contract that is unlikely to finish in the money. Let’s look at another hypothetical trade in the S&P 500 but this time we will use technical analysis (rather than fundamental analysis) as the basis for our decision making. Let’s again assume that we have entered into a 1 month CALL option in the S&P 500. The trade is posting a lackluster performance for the first three weeks, with prices slowly moving lower the entire time.
Our trade is already “out of the money” but then an additional wave of selling pressure causes prices to fall through a major level of technical support, and this accelerates price momentum to the downside (putting the trade even further out of the money). With prices now falling rapidly, it is unlikely that prices will move into positive territory with only one week left on our options contract. Since we do not believe the trade can close in the money, we choose to cut our losses and close the trade.
Doing this helps us to recover some of our losses (rather than experiencing a total loss in the trade) and this puts our account in a better position when moving on to the next trade.
Conclusion: Carefully Structure Your Position Exits
Variable options are a relatively new feature in the markets, and the added level of flexibility that these create can give traders some great advantages when looking to manage their trades. This can be seen in both positive (in the money) trades and in negative (out of the money) trades. With market conditions always changing, traders can look for fundamentally driven news events or technical formations on price charts when actively managing positions. You can read a lot more about this topic in our binary options trading school.
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