Binary options offer investors more security and simplicity than traditional options.
But still, you may be looking for similar security, but double the profit.
Binary option ‘Fence trading’
Fence trading provides the opportunity to increase your profit by creating a range – two fences – for an asset’s price.
You may win a little less often, but you’re going to win twice as much.
Frequently when making trades, you may be confident that an asset’s price is going to rise in the short term, but fall before the expiration date.
In this case, consider binary fence trading. Under this strategy, you first act as if you were completing a standard binary option trade.
For instance, if you are bullish, you buy a call.
Assuming that the asset’s price follows your expectations and is “in the money,” yet you expect the price to fall, you complete a second transaction: buy a put.
The two contracts establish two fences, so that if the price falls between both, you profit twice.
If it falls outside of one, your only expense is the purchases of the options.
Key is the second purchase
The key to fence trading is timing the second purchase. You have to change mindsets: from bullish to bearish.
When you think the asset’s price has reached its peak, it is time to buy this put.
If the peak has not been reached and the price continues to rise, it will be a challenge to fall between the two fences.
If you were bearish from the start and believe that the price has hit its trough, your second contract is the purchase of a call.
Quick caution: you’re going to double your profits if the two payoffs are equal. The payoffs could vary if you trade a different amount or the return rate has changed.
Example of Fence Trading
The US Federal Reserve Board is expected to announce a second round of quantitative easing on November 3rd.
Quantitative easing increases the money supply and results in inflation, thus weakening of the dollar.
Here, you may want consider shorting the dollar.
This can be done through completing a EUR/USD call option at 1.37.
Let us assume that this position goes “in the money” up to 1.40. Then, however, you fear that the Fed will release information suggesting that quantitative easing may not actually be employed.
The Fed’s statement would likely strength the greenback, mark the peak for the EUR/USD and time to buy the put option.
Hence, you purchase the put, and establish fences at 1.37 and 1.40.
Anywhere inside these fences will make you a big winner.
