Binary Options volatility strategy

With Binary Options, traders can develop strategies that cannot be implemented so easily with other financial instruments. The volatility strategy presented here is based on the sometimes extreme price fluctuations of the markets, which are caused in particular by important news events.

See the news event calendar which can be used for the volatility strategy:

Economic news calendar for huge volatility

The aim of this strategy is not to predict the direction of market movement, but to take advantage of a large movement, whether upward or downward. Binary Options are very suitable for trading in highly volatile markets because of the clearly limited risk and the high return if successful. Let’s look at the concrete strategy, in which a call and a put option with the same term are bought in order to trade the markets successfully in volatile times.

Calculated risk and high profit when the market moves

Traders are familiar with these special market situations, especially before significant events such as the publication of US labor market data or interest rate decisions of the European Central Bank (ECB). It can often be assumed with a high degree of probability that – regardless of whether the expectations of the market participants come true or not – there will be a major movement with strongly falling or strongly rising prices.

Although the direction of the price movement cannot be predicted, this is not a dilemma in the case of the presented volatility strategy with Binary Options.

See the market movement on the US labot market data:

Binary Options: Return and risk clearly defined

For Binary Options, the maximum risk is known in advance and is defined by the stake, which is determined by the trader himself. If, for example, 50 USD is invested in a call option, the maximum loss is 50 USD (some brokers offer a repayment of up to 15% to hedge against losses).

This case occurs if the option is out of the money at the end of the term, i.e. the trader’s market assessment was wrong. In the positive scenario, if the option is in the money at expiration, the trader achieves a return of about 65-85% on the invested capital in classic call/put trading, depending on the provider.

Binary Options principle

High returns possible with special trading types

In addition, many brokers, such as Deriv, offer further trading modes, which are particularly interesting in special market situations. The “one-touch” trading at Deriv enables returns of more than 300% in the high-yield mode, provided that a certain target price is at least temporarily reached during the option term. Exactly this trading mode is interesting for our strategy.

With the Touch-Options, you can earn a high yield on market events because the volatility is very high. You should open the trade before the market news occurs because the broker will limit the yield on high volatility. For example, you can open trades in 2 directions with one-touch options. If the yield of more than 100% is can a profitable event.

Practical implementation

First of all, an account with a binary options broker is required. With IQ Option or Deriv, an account can be opened with a deposit of 10 USD or more. Alternative brokers can be found in our Binary Options Broker comparison.

See the broker list below:

Broker:

Rating:

Advantages: 

Start trading: 

IQ Option logo
5/5

+ Yield up to 100%
+ Best platform
+ 24/7 support

Deriv logo
4.5/5

+ Yield up to 95%
+ Auto trading (bot)
+ MetaTrader 5

Pocket Option logo
4/5

+ Yield up to 92%
+ Bonus program
+ Accept any clients

Now you can find the “One-Touch” mode on the trading platform, which is interesting for our strategy. Let us assume that a key interest rate decision of the European Central Bank (ECB) is imminent. A good overview of all important news events can be found for example on https://www.investing.com/economic-calendar/.

The market environment is already very turbulent due to the financial crisis and market participants expect steps by the central bank to calm the financial markets. We assume that market participants will either be very disappointed or almost euphoric about the interest rate decision and especially about the important comments of the ECB president.

Purchase of a call and a put option

In order to cover both extremes, a call and a put option are purchased in the trading mode “One-Touch” on the currency pair EUR/USD with the same term and the same capital investment. In the illustrations, this trade is shown as an example at Deriv. Deriv guarantees a return of up to 350% on short-dated one-touch options in high-yield mode.

We decide to invest 100 USD each in one call and one put option with a 350% return. The maximum risk is therefore 200 euros and only comes into play if the expected market movement does not materialize after the ECB decision.

We see that the current price of EUR/USD is 1.11900.

In order for the call option to generate an achievable return, the price must have reached or touched at least 1.12000 by 15:00. In the case of the put option, the price would have to fall accordingly to 1.11800 for the option to be in the money and the profit to be realized.

See the screenshot below:

With regard to the term of the options, care should be taken to ensure that market participants sometimes need a few minutes to interpret the information and only then does a major market movement set in.

Let us now present the following scenario:

The ECB leaves the key interest rates at their current level and at the same time declares that it will take all necessary steps to support the euro in the long term with immediate effect. The unsettled market participants react with enormous euphoria – the strengthened confidence in the euro is reflected in a price firework and the euro gains almost 100 pips within minutes, i.e. the EUR/USD exchange rate rises from 1.11900 to 1.12000

What does this mean for our two binary options?

First, we lose the $ 100 in the put option, which we used to cover the possible scenario of falling prices. Fortunately, the target price of the call option is clearly exceeded due to the strong market movement. So we earn 350% in the call option and thus receive 450 USD paid out at 100 USD stake – which, taking into account the loss with the put option, results in a total gain of 250 USD, and that within a very short time!

If market participants were to react disappointed with regard to the euro and EUR/USD were to fall at least to the target price of the put option, we would achieve the same result of a profit of $ 250. In the scenario described above, a movement of only about 40 pips within the option’s life must occur to close the trade positively!

Binary Options Volatility strategy: Trading in 5 steps

To take advantage of strategies such as the volatility strategy explained here, traders should first familiarize themselves with highly speculative financial instruments. We have summarized the most important information in the following points and clearly explain which five steps will lead you to your first trade.

  1. Search for a market event (3-star news event) in the economic calendar
  2. Choose a suitable currency pair for it
  3. Open a one-touch option in both directions with a strike price (call, put)
  4. Wait for the event
  5. Make profit when the high volatility touch the strike price

Conclusion: One-touch trading – high return opportunities in special market situations

The example presented here clearly shows that in volatile markets, high returns can be achieved with manageable risk using one-touch options. It should be noted that not all brokers offer the one-touch mode but you can also trade it with normal Binary Options.

In addition, one-touch trading is usually only possible on a limited number of assets and is often not offered during the entire trading period. You should, therefore, choose a broker who offers one-touch trading even during volatile phases. If necessary, multiple trading accounts are also useful to gain independence and flexibility.

(Risk warning: Your capital is at risk)


See my other articles about Binary Options:

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