1. Introduction - Day Traders
  2. Introduction - Day Trading and Options
  3. Types of Options
  4. Near Month In-The-Money Options and The Protective Put
  5. Stock Options and Weekly Options
  6. Mini Options
  7. Index Options and Mini Index Options
  8. Binary Options
  9. Options on Futures
  10. ES Weekly Options and E-Mini Options
  11. ETF Options and IRA Options
  12. Conclusion

8. Binary Options. Binary options can go by many other names. On forex or interest rate markets, they are called digital options. On the American Stock Exchange they are called fixed-return options (FROs) or all-or-nothing options. They are called binary because they offer returns in only two outcomes: something (for example, a preset amount of $100) or nothing. Generally the following assets can be used for binary options day trading:

  • Currencies
  • Stock indexes
  • Stocks
  • Commodities (limited)

There are many types of binary options, but there are two that day traders more commonly use:

  1. The cash-or-nothing binary option, which pays a predetermined amount of cash if the option is in-the-money on expiry.
  2. The asset-or-nothing binary option, which pays the value of the underlying security. This is why these options are named binary options. There are only two potential results when purchasing this investment.

The idea of day trading binary options is quite simple. A trader’s intention is to open a trade position and then to close it within the same trading day.

Note that all binary options contracts have expiry dates and times, which means that the standard binary options contract has a fixed expiry date unless a platform that the trader is using offers a variable option expiry.

For day traders, it is important to select an expiry date that will terminate the trade within the same trading day, as once the trade has become active with a set expiry date, the trader is unable to manually close the position as is possible with other types of option trades.

The potential return, when buying a binary option, is already calculated and known by the day trader before the purchase is made. And since binary options can be exercised on almost any financial product and in either direction (call or put), day trading with binary options can be easy and profitable resulting in high returns that are immediately paid out.

Besides the potential of high returns, binary options offer the day trader several benefits:

  • Traders can choose variable time expiries to suit various strategies.
  • Traders manage their own accounts. There are no brokers involved which mean lower costs.
  • Traders can simultaneously trade diversified options.
  • Traders can make small, multiple initial investments, providing an accessible form of day trading with a limited risk. With one successful trade, it is possible to make up for many losses.
  • Traders have constant opportunities to profit throughout the day. There is no unnecessary downtime.
  • Some traders find day trading binary options both rewarding and exhilarating.  The potential gain is high, and the turnaround can be remarkably speedy.
  • With constant expansion in the binary options market, there is always a new opportunity for the day trader to capitalize on.
  • Due to the private method of trading in this market, there is a high degree of innate security.
  • With the transparency of risks and short timeframes involved in the day trading of binary options, volatility is less of an issue.

Smart day traders follow trends and patterns in the market. By recognizing one true trend, they can attain continued profits without needing to adjust their strategies. However, if the trend is not working due to the short trade times, false trends can be exited quickly and any loss can be minimized.


Options on Futures
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