How to Trade Binary Options?
How to trade binary options has become a common question for novice trader who want to learn to trade in binary options trading platform. However, not everyone understands how to trade binary options.
Usually, novice traders will consider that Binary Options is a simple money machine by just choosing a CALL or PUT. Big NO! Everybody will becoming rich instantly.
No one can guarantee you a 100% win rate! Even binary signals providers could only give you 80% win rate and have a chance to lose by 20% lose rate.
So, How to Trade Binary Options?
A simple way to trade Binary Options is only select CALL or PUT, and you wish like James Bond and said ‘Bet it all on red’ (Skyfall Quotes). Bond is rich and have excess money, so it doesn’t matter for him but not you (just kidding).
Seriously if you want to trade binary options, you should to know the formula or the strategies. Yes, binary options has a formula and strategies.
First, i will show you the binary options formula, called Black–Scholes valuation.
Black–Scholes Binary Options Formula
You can found the price of option by following the formula of Black–Scholes model. In fact, the Black–Scholes formula for the price of a vanilla call option (or put option) can be interpreted by decomposing a call option into an assetornothing call option minus a cashornothing call option, and similarly for a put – the binary options are easier to analyze, and correspond to the two terms in the Black–Scholes formula.
Description of Formula
S is the initial stock price
K denotes the strike price
T is the time to maturity
q is the dividend rate
r is the riskfree interest rate
σ is the volatility
Φ denotes the cumulative distribution function of the normal distribution,
and
Cashornothing call
This pays out one unit of cash if the spot is above the strike at maturity. Its value now is given by
Cashornothing put
This pays out one unit of cash if the spot is below the strike at maturity. Its value now is given by
Assetornothing call
This pays out one unit of asset if the spot is above the strike at maturity. Its value now is given by
Assetornothing put
This pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by
American Style
An American option gives the holder the right to exercise at any point up to and including the expiry time T. That is, denoting by K the strike price, if K ≥ S (resp. K ≥ S), the corresponding American binary put (resp. call) is worth exactly one unit
The price of a cashornothing American binary put (resp. call) with strike K < S (resp. K > S) and timetoexpiry {\displaystyle T} T is
where erf denotes the error function and sgn denotes the sign function. The above follows immediately from expressions for the Laplace transform of the distribution of the conditional first passage time of Brownian motion to a particular level.
Foreign Exchange
If we denote by S the FOR/DOM exchange rate (i.e., 1 unit of foreign currency is worth S units of domestic currency) we can observe that paying out 1 unit of the domestic currency if the spot at maturity is above or below the strike is exactly like a cashor nothing call and put respectively. Similarly, paying out 1 unit of the foreign currency if the spot at maturity is above or below the strike is exactly like an assetor nothing call and put respectively. Hence if we now take , the foreign interest rate, , the domestic interest rate, and the rest as above, we get the following results.
In case of a digital call (this is a call FOR/put DOM) paying out one unit of the domestic currency we get as present value,
In case of a digital put (this is a put FOR/call DOM) paying out one unit of the domestic currency we get as present value,
While in case of a digital call (this is a call FOR/put DOM) paying out one unit of the foreign currency we get as present value,
and in case of a digital put (this is a put FOR/call DOM) paying out one unit of the foreign currency we get as present value,
Skew
In the standard Black–Scholes model, one can interpret the premium of the binary option in the riskneutral world as the expected value = probability of being inthemoney * unit, discounted to the present value. The Black–Scholes model relies on symmetry of distribution and ignores the skewness of the distribution of the asset. Market makers adjust for such skewness by, instead of using a single standard deviation for the underlying asset σ across all strikes, incorporating a variable one σ(K) where volatility depends on strike price, thus incorporating the volatility skew into account. The skew matters because it affects the binary considerably more than the regular options.
A binary call option is, at long expirations, similar to a tight call spread using two vanilla options. One can model the value of a binary cashornothing option, C, at strike K, as an infinitesimally tight spread, where is a vanilla European call:
Thus, the value of a binary call is the negative of the derivative of the price of a vanilla call with respect to strike price:
When one takes volatility skew into account, σ is a function of K:
The first term is equal to the premium of the binary option ignoring skew:
is the Vega of the vanilla call; is sometimes called the “skew slope” or just “skew”. Skew is typically negative, so the value of a binary call is higher when taking skew into account.
Relationship to vanilla options’ Greeks
Since a binary call is a mathematical derivative of a vanilla call with respect to strike, the price of a binary call has the same shape as the delta of a vanilla call, and the delta of a binary call has the same shape as the gamma of a vanilla call.
Ah, it’s very complicated right? Or may be no. If you love Math, you can use this formula to start trade binary options.
If this formula is very complicated to you, so let’s take a look how to trade binary options with more simple strategies below.
Binary Options Trading Strategies
There are several strategies in trading that you can follow. Of course, you have to adapt these strategies to your level. If you are a beginner, use a binary options strategy that is easy to follow.
Ok, let’s start trading with these strategies.
1. Stock Market Trend Strategy
This strategy is suitable for beginner traders, because you only need to observe the movement of the ongoing stock market trend.
Choose CALL, if the trend line shows that the asset is going to rise. And choose PUT, If the trend line shows a decline in the price of the asset.
2. Pinocchio Strategy
Traders utilize a Pinocchio Strategy when the asset price is expected to fall or rise drastically at the contrast direction.
Traders will choose CALL if the value is expected to rise, then choose PUT if the value is expected to go down.
3. Straddle Strategy
During market volatility, you can use straddle strategy. This strategy is also best applied before the break of important news related to specific stock or when analyst predictions seem to be afloat.
This strategy help trader to avoid the CALL and PUT option selection, but instead putting both on a selected asset.
The overall idea is to utilize PUT when the value of the asset is rise, but there is an indication or belief that the asset will being to drop soon. The straddle strategy is greatly admired by traders when a particular assets has a volatile value.
4. Risk Reversal Strategy
Risk Reversal Strategy is suitable for more experienced binary options traders. This strategy is executed by setting CALL and PUT options all the while on an individual fundamental resource. This is particularly advantageous when trading on resources with fluctuating qualities. Normally, double options can encounter two conceivable results and trading on a two for two inverse’s expectations over an individual resource on the double, ensures that no less than one will produce a positive result.
5. Hedging Strategy
This strategy is good to protect and minimize the associated risks. This strategy is executed by setting both Call and Puts on a similar resource in the meantime. This guarantees paying little heed to the course of the advantage esteem, the exchange will produce an effective result. This furnishes the financial specialist with benefits of an “in the cash” result. This is an awesome method for ensuring yourself as a speculator in whichever situation is created. It’s kind of a protection strategy that sets you up for any situation.
6. Fundamental Analysis
This strategy is mostly utilized during stock trading and primarily by traders to helm gain a better understanding of their selected asset. This increases their chances of accuracy in the prediction of future price changes. This approach involves conducting an indepth review of all of the financial regards of the company. This info should include earnings reports, market share and financial statements.
Now you know how to trade binary options using formula or strategies.
If you find it difficult to learn them all, you can buy binary options signals service.
I hope this article can be useful to you and you are willing and able to learn them well. Perhaps this article is too long, but this is good for you to read.
REFERENCE:
http://www.imdb.com/title/tt1074638/quotes
https://en.wikipedia.org/wiki/Binary_option
Hull, John C. (2005). Options, Futures and Other Derivatives.
http://www.7binaryoptions.com/strategies/

Rating
The formula is little bit complicated, but binary options strategies is the good choice. Simply watching a chart to decide put or call, but not as simple like that of course.
Do you have a recommendation of binary options signals providers Mike?
Auto Binary Signals is the best one. Also, you can browse all binary options providers here.
Thanks for your sharing Mike.
Now i know that trading is not a simple as i imagine.
Maybe i need to find a cheap binary options signals providers before i decide to trade by own self.
Even if you are 24Option trader, you can try free signals provided by John Anthony.
I am pretty sure if trend strategy is the most used strategy to trade in binary options, or maybe traders combine it. Because market stock trend is very important to have a bigger chance to win.
By the way, the formula is make me confuse lol.
Yes, many traders still watching for market stock trend before they start to trade.