When trading binary options the choice of the binary option trade/contract matters. It will determine how well you succeed.
However, although you should be very cautious of the type, you also have to ensure that you understand the type of contract that you choose to use.
Which is the best binary option trade?
There is never a “best” binary option contract/trade for every trader. Each trader has his/her best choice depending on how they like to trade.
However, when choosing the type of option trade/contract, it is good to keep in mind the expiry time, reward (payoff and return).
A good option trade should have both the payoff and the return because at times the markets may misbehave no matter how well you analyze them and you would not want the broker to go with all your initial investment. Actually, you should go for a broker who offers option contracts with more the returns in case the options expires when not in your favor.
The other thing is the expiry time. Generally, different markets behave differently and you should be cautious of that when choosing the option contracts. For example, Forex, commodities and CFDs markets are known to be very volatile and the best contract options to use when trading them in Binary options is the option contracts with medium to short expiry times. On the other hand, when it comes to the stock markets, they are a bit ‘draggish’ and you can choose binary option contracts with long expiry times.
If possible, you should also look for an option contract with extra conditions apart from the payoff/returns and expiry time. It should have some other features such as the strike price and so on.
Types of binary option trades
There are quite a variety of binary options contracts and you should look for a broker who offers the majority of them if not all. With many choices at your disposal, you will be better placed to choose the best that suits you most.
Below are the different types of binary option contracts:
1. High/Low or Call/Put Option
This is the simplest of them all. As a trader, you will only have to predict whether the market prices will rise or drop within a given period of time. If you forecast/predict that the market prices will rise, you enter a ‘Call’ which is also referred to as ‘High’ buy some brokers; it will all depend on the name on the button of your broker’s platform.
On the other hand, if you predict that the market prices will drop, then you place a ‘Low’ which is also known as the ‘Put’.
You then sit back and wait for the set expiry time to expire and if it expires in your favor you get the payoff and if not you get nothing or you get a small return depending on your broker.
2. One Touch Option
In this type of contract, the trader first analyses the markets and predicts whether the market prices will rise or fall. Then, the trader chooses a specific value which he anticipates the market prices will touch/reach when they rise and fall.
Therefore, when placing a put, the trader specifies the specific predicted price that the market prices should touch before the contract expires. If the prices touch the prices, then the contract is closed and the trader gets his/her payoff. But if the set expiry time expires without the predicted price level being touched, then the trader makes a loss.
No matter how correct you are in predicting the direction of price movement, the specified value of market price has to be hit/touched for you to qualify for a payoff.
For example, let’s say trader places a one touch put option on EURUSD at a price of 1.2134. Then, we specify a value of 1.2114 with an expiry time of 2 hours. The market prices have to drop and touch the 1.2114 before 2 hours expires so as to get a payoff.
This contract type is best with medium to long expiry times.
3. No Touch Option
With the No Touch, the trader analyses the market and predicts the direction of the market prices.
However, the trader selects a specific level/value that the market prices should not hit/touch within the set expiry time. So the market can move in the predicted direction but should not go past the set value before the time expires.
For example, a trader can place a call option on the Google stock at a market price of $576 and specifies a touch price of $580 for an expiry of 5 minutes. If the prices do not hit the set price before the expiry time, then you get the payoff.
It is best for short expiry times.
4. 30 Seconds Option
Here the trader predicts whether the market prices will rise or fall within a period of 3o seconds. It is a form of ‘scalping’ in binary option trading.
If the trader predicts that the prices will fall then he/she places a 30 seconds put option. If the prices will rise, the trader places a 30 seconds call option.
After 30 seconds, the contract expires and the trader gets his/her payoff if the contract expired in his/her favor.
This are the types of options where the trader can initiate the directive before the expiry period expires depending on whether the option is in-the money or out-of-the-money. The payoff in such cases will depend on the broker.
For example, you may find a broker who gives a 50% payoff for Option+ contracts while if the trader would have let the contract to expire after the set time he/she would have made a 70% payoff.
With Option+, the trader always makes a lesser amount of profit compared to what they would have received if the contract expired on its own without the trader executing it himself/herself.
6. Boundary contract options
These types of contracts normally have set boundaries/ values where the market prices should oscillate in. According to the option conditions, the rates should stay within the set boundaries or outside the set boundaries.
In short, the prices should not touch or cross the set boundaries.