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Binary Options Strategy: Option Scalping

Updated on March 12, 2016

Binary Options Trading Is Gaining Popularity

Binary options trading and strategy are becoming more widespread.  Scalping is one technique being used today.
Binary options trading and strategy are becoming more widespread. Scalping is one technique being used today. | Source

Binary Options Scalping

Binary options scalping is a technique developed in the forex and futures markets. It captures small profits from small movements; scalping trades may last anywhere from 30 seconds to 5 minutes. Many options offered in the futures and forex markets are binary, which makes this strategy profitable when used effectively. Options scalping and binary options scalping are legal trading strategies and should not be confused with other forms of investment scalping.

  • Binary Options Scalping - The strategy of making repeated small profits on small, super short term, movements in the underlying issue.
  • Investment Scalping - The illegal practice of buying a stock and then recommending it with the intention of running up the price in order to sell at a profit.

Options scalping began in the forex markets. Traders learned that they could make small amounts of profits in less than minutes by buying an option and selling it after the underlying currency pair moved only a few pips. By buying and selling numerous times in one day or week they were able to accumulate substantial profits. The problem is that most forex brokers frown on the practice and have enacted policies and standards that hinder if not prevent it. This is in part what led to the rise of online binary options trading.

What is a binary option?

Binary options are a derivative trading instrument different from standard options. These differences should be consider carefully, they may affect the suitability of binaries for individual accounts.

The main difference is the pay-out structure. Standard options pay out based on many factors including the price of the underlying and the strike price of the option. Payouts are not guaranteed and can range from 100% loss to gains of over 1000% depending on how much the stock has moved. Binary options have only two possible outcomes, all or nothing, which is why they are called binary. The only factor affecting the pay out of a binary option is whether or not the underlying closes in or out of the money. In the money results in maximum gain, out of the money results in maximum loss.

The next major difference is the expiration. Standard options have expirations yearly, quarterly, monthly and in some cases weekly. These can be bought and sold at any time between their first listing and expiration with prices varying based on volatility, the underlying and amount of time value left. Binary options usually have much shorter expirations that can range from 1 minute to one month. These options can be bought at any time but usually must be held until expiration with no chance of preventing losses should the trade turn against you. Some of the binary options platforms and brokers are now allowing early sale of options. This is on a broker by broker basis and comes at a steep price.

Binary Options Scalping Strategy

Binary options were made for scalping. These options are largely unregulated, offer nearly the same exposure to forex and commodity trading as the real thing and are affordable for the average investor. Binary options can be purchased for as much or as little as your account and platform allow. They can also be purchased with expirations ranging from 1 minute to 1 month.

Pros Of Binary Option Scalping The pros of scalping are obvious. The trades are short, exposing your account to less volatility. The trades are also profitable. Binary options only require the underlying to close in the money in order to pay the maximum return. This means that for most trades the underlying will only have to move one point in order to profit. There is no worry over how much the market will move in your chosen direction, only that it will.

Cons Of Binary Options Scalping The cons, to me, are just as obvious. There is just no guaranteeing that the market, stock or currency pair will move the way you want it to in 1, 2 or 5 minutes. You could just as easily earn the maximum loss as the maximum reward. Further, even if your binary options broker allows for early close out of your options you may not have time to do it. It is generally agreed by traders, and I am one of them, that technical analysis and fundamental analysis are ineffective in such short term time frames. These trades are pure gambling.

Binary Options Platforms

There are dozens, if not hundreds, of binary options platforms to choose from. It is important to find the one that best suits you. They don't always offer the same trading products and they don't all pay out the same way. Some binary platforms are not regulated and are also not available for US traders. Be sure to look carefully into each platform to determine if its right for you. Things to look for:

  • US availability
  • Minimum Deposits
  • Limitations, if any, on withdrawal
  • Types Binary Options Offered And Types Of Expirations
  • Which Underlying Assets Are Available
  • Always Read The Reviews Before Making A Deposit

I prefer to use 24Option for trading hourly and daily expirations. I prefer Anyoption for trading weekly and monthly expirations.

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