For a volatile asset, like bitcoin lately is, binary options provide an easy way to manage your exposure and emotions. As your losses are limited it is less likely that you will make impulse trades that are not in-line with your plan. In fact, it is easier to have a proper trading plan with binaries in the first place.
How? This article will guide you through it in 4 simple steps!
Let’s begin with a quick look at the factors that could fuel a new up-trend in the cryptocurrency!
The Bullish Case for Bitcoin
Bitcoin enjoyed a great run-up since the end of August; the price has risen from around $200 to as high as $450 in early November. Although since then the market experienced a correction back to $300, BTC looks to hold that all-important level. $300 is the upper barrier of the trading range where bitcoin consolidated after its steep decline in 2014. Now that it has broken out of the range decisively, the technical picture looks promising.
Building a binary options position in bitcoin
Binary options only require you to guess the direction of the price of the given asset from the current level. Looking at the technical evidence and the obviously positive fundamental background, BTC is a clear bullish candidate. Now you only need to figure out the optimal strike price and expiration date to get you going.
But before that you will need a binary broker to give you access to these products!
Step 1: Selecting a broker
The factors that you should consider when selecting your broker are the following:
- Reliability—the history of the broker
- Payout Ratio—determines your profit
- Commissions and Fees—the cost of trading
- Trading Platform—you should feel comfortable with the platform
There are numerous options out there but as it is a quite new and booming segment of the market you should be aware of some of the brokers who have a bad history when it comes to withdrawals and customer service. You should get to know your broker before investing your capital! A reliable choice in binary trading is Optionsclick with good payout ratios and an easy-to-use platform.
Step 2: Choosing a strike price
With binary options, the crucial factor is the strike price. This price is the only condition that determines whether you have a profitable position or a loser. If the price is higher at the expiration date (and exact time of course) you will have the whole amount of the payout, but if it is lower than you will lose the buying price of the option. Generally speaking the (considering a bullish position) the higher strike you choose the lower your chances are but the higher the payout is.
It is a wise decision to build a strike ‘ladder’; don’t invest all your dedicated capital in one option. If you do this you will be able to profit from moves that don’t reach your final target price. For example, if you think that bitcoin will reach $500 you might split up you position into four options with strikes of $350, $400, $450, and $500.
Step 3: Determining the optimal expiration date
After you have decided on the strike price(s) you should think about the time frame of your trade. You may also build a ‘portfolio’ of expiration dates to spread out your risk in time. This way even if bitcoin will keep on having wild swings you will be able to benefit from the general trend without constantly worrying about the price.
If you mix different strike prices and expiration dates your options portfolio will be diversified both price and time wise!
Step 4: Planning your exit
This is the best part of binaries compared to “traditional” trading—you don’t need to have an exit plan! Your initial position will contain that! That removes emotions from the equation and that is an invaluable advantage in a volatile market!
An Interesting Alternative: Pair Options Trading
Pair options in the realm of binaries will provide you with further choices to profit from the bitcoin bull. You can select a wide range of assets to compare BTC with. This way, if you have a strong negative opinion on virtually any asset, you will be able to benefit from the relative performance of bitcoin. I encourage you to check out this Stockpair Broker Review about one of the pioneers in the business for more information.
Whatever types of options you choose don’t forget to control your exposure—just trade with the amount that you are willing to lose should your views prove wrong. With binaries you don’t need to worry about stop losses or profit taking orders; your position size will be your stop loss!