In 2008, the Chicago Board Options Exchange (CBOE) introduced binary options trading to the public. Since then, trading binary options as viable means of making money through the financial markets has seen expeditious growth.
However, traders often start their options trading career without knowing the exact strategies proven by professionals to be profitable over time. Thus, they face many challenges in the early stages of their career. Traders can learn more about trading from websites such as https://www.binaryoptions.com/ca.
As a beginner trader looking to build a profitable options trading career, you need to learn and apply the right strategies. You also need to develop the right mindset.
This article will list the top five strategies professional options traders use to thrive in the options market.
Top five strategies used by professional binary options traders
Many professional binary traders adopt different strategies. Successful traders stick to a particular strategy. Successful traders also need to improve their mindset, tools, and knowledge. Here are the top strategies applied by most professional binary options traders:
● Long Call
A long call trade refers to “going long” or “buying a call” on a stock price with the expectation that the price exceeds the strike price (long call price) by expiration. This type of long strategy involves no upside target. The trader’s potential earnings can be monumental if the stock enters an extended Bull Run.
For example, a stock price is trading at $10 per share, and a long call is placed at the same price, with an expiration by the week’s end at $1 per contract. If the total contract costs $100 ($1 *100), then for every increment by $1 of the stock price, the profit from the trade will increase by $100. The trader will break even at $11 per share or the strike price (-$100) plus the profit per movement per contract.
● Covered Call
A covered call is a more technical way of selling a call option on a stock. This strategy is popular among professional traders because it minimizes the risk of placing a naked call option on the stock. Here, the trader buys the underlying stock and places a sell call option on the same shares. The problem here is that the trader will have to sell shares at the short strike price.
For example, an investor buys 100 shares of a stock and simultaneously places a sell call option against each share. If the stock price catches a bull run, the investor’s short is covered by the original shares he bought. It’s often used by traders who enter a short-term position in a stock counter-tend to their longer-term bias.
● Bull Call Spread
The bull call spread strategy is executed when a trader buys calls at a certain strike price. And at the same time, sells the same number of calls at a higher strike price, with both call options having the same expiration date.
Professional traders usually do this when they are optimistic about the underlying asset and want to control the net premium spent in entering a direct long call on the asset. However, this strategy has a flaw. Unlike an outright long call option, the trader is not exposed to massive profits if the asset does an extended bull run. Instead, he chooses to mitigate the expenses of holding an outright call option.
● Bear Put Spread
The bear put spread strategy is a lot like the bull call spread, only that this time, the trader sells the same number of puts at a lower strike price. Of course, it only qualifies as a bear put spread when both assets purchased have the same expiration date.
Professional traders usually use this strategy when they are bearish on the underlying asset and anticipate a price decline. Its main purpose is to mitigate any potential loss from the trade. However, it also limits the number of profits made if the trade was an outright put.
● Long Straddle
Professional traders use the long straddle strategy when an impulsive price leg is anticipated. Still, there is uncertainty concerning the ultimate direction of the underlying asset. Here the trader places a call and puts an option on the asset with the same strike price and expiration date.
In theory, the strategy allows investors to participate in the next impulsive price swing while having a loss controlled by the cost of both call and put contracts. It is quite popular among high-risk takers because it allows unlimited gains from the underlying asset like an outright call or put option.
Conclusion
Trading binary options involve high risk; a trader needs to understand basic strategies and risk management models to make a successful career. Many professional binary options traders have more than five strategies in their repertoire, even though they would often implement only a few at any given time. To be successful at binary options, you must stick to a particular trading strategy. To pick the right trading strategy, you need to identify your strengths and maximize trading opportunities. You need to develop the right mindset. The strategy that works for a friend might not work out for you. It is always advised to start a binary options trading career with what you can afford to lose; don’t bet on your life savings. If your binary options trading career is getting daunting, you can take a break by indulging in fun activities.
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