Managing Risk With Binary Option Trading
For traders who operate in the field of binary options, a proper calculation of risk and reward is critical. There are a number of factors that traders must weigh in managing risk when trading in binary options, and a review of these may assist new traders and experienced traders alike.
One of the advantages of binary options is that the exact risk and reward ratio of each trade is known at the outset, and reflected in the payout percentage. If the payout is 50%, you will need to get at least two trades right for every one that goes wrong to be profitable overall. If the payout is 80%, you will need to get at least five trades right for every four trades that go wrong to maintain profitability.
The differential between the payout percentage and the cost of losing trades is thus a critical factor for traders who are preparing to engage in binary options trading.
Fixed Payouts Above 100% Available
Brokers are responding to traders’ focus on risk management by offering binary options that provide fixed payouts above 100%, with some paying as much as 500% of the option price. Naturally, this more favorable risk-to-reward ratio is usually offered on binary options for which the probability of securing a payout is lower.
Traders who have strong confidence on the direction of a particular asset, even where the overall market thinks differently, may be attracted to these high-paying options. After all, the occasional purchase of such an option can be mixed with trades in more regular, and less high-flying, options, as traders organize their overall trading strategies.
Another risk management strategy available to binary options traders involves exiting trades before the binary option expires. Traders who, prior to the expiry date, change their opinion of the direction of the underlying asset may appreciate the ability to exit a trade with either a smaller gain or a smaller loss than would occur at expiry. It should be noted that this capability is not available from U.S.-based brokers, and is only offered by a minority of foreign brokers, but traders will naturally want to be aware of its existence.
Lower Risk Exposure To Underlying Markets
Stock and bond market traders and investors must consider the liquidity and default risks associated with their investments. Alongside the question of whether their holdings will rise or fall in value, there is the question of whether a company they invest in will go bankrupt, or whether a government (local, state, or national) will default on its bonds, leaving investors who could perhaps tolerate a small loss with a total loss.
Binary options traders are exposed to none of these risks. Because binary options do not own the underlying financial asset, changes in the liquidity of the underlying market will not change the trader’s risk profile. As the investing public encounters increasingly volatile world markets, this is a signal advantage.
Different Risks And Different Rewards
Whenever a market is active and trading, anywhere around the globe, binary options traders will be able make directional trades in it, and trades predicting asset price volatility. While the risk profile of binary options trading is different from that of more conventional financial markets, so are the rewards, and an increasing number of people are utilizing binary options as part of their overall investment strategy.