Binary options strategies for directional and volatility trading

Binary
Options


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Binary
Options
Strategies for
Directional and
Volatility Trading

ALEX NEKRITIN

John Wiley & Sons, Inc.


Cover Design: John Wiley & Sons, Inc.
Cover Image: (c) Andy Hair/iStockphoto
Copyright © 2013 by Alex Nekritin. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
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Library of Congress Cataloging-in-Publication Data:
Nekritin, Alex, 1980–
Binary options : strategies for directional and volatility trading / Alex Nekritin.
p. cm.—(Wiley trading series)
Includes index.
ISBN 978-1-118-40724-0 (cloth); ISBN 978-1-118-41777-5 (ebk);

ISBN 978-1-118-52868-6 (ebk); ISBN 978-1-118-42182-6 (ebk)
1. Options (Finance) 2. Futures. I. Title.
HG6024.A3N448 2013
332.64'53—dc23
2012032301
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1


This book is dedicated to my parents, Nina and Boris Nekritin.
Thanks for all your unconditional love and support.
Without you, none of this would have been possible.


Contents

Foreword

xi

Preface

xiii

Acknowledgments

xvii

PART I

Introduction to Binary Options

CHAPTER 1

What Are Binary Options?

On What Asset Classes Are Binary Options Available?

1
3
3

Binary Options vs. CBOE (Vanilla) Put/Call Options

10

Advantages/Disadvantages of Binary Options

13

Reasons to Trade Binary Options

14

PART II

17

Binary Options Theory

CHAPTER 2

What Does Binary Mean?

19

Components to a Binary Option

20

Long Trading

22

Short Trading

24

CHAPTER 3

Pricing

29

Strike Price

29

Time Value

30

Price as a Natural Market Consensus

32

Reading a Binary Option Chain

35

vii


viii

CONTENTS

PART III Trading Binary Options

41

CHAPTER 4

43

Binary Options Contract Collateral

Margin and Debit Risk of Vanilla Options and Futures

43

Collateral Explained

44

Binary Options Expiration Values

44

Collateralizing a Long Trade

45

Collateralizing a Short Binary Options Trade

50

The Mechanics of a Binary Options Short Trade

50

CHAPTER 5

Settlement

59

Settlement on Binary Option Long Trades

59

Commissions and Fees

73

CHAPTER 6

75

Entering and Exiting Binary Option Trades

Reading Quotes

75

Reading an Order Ticket

76

Exiting Trades

78

Exiting Your Trade before Expiration

81

CHAPTER 7

Keys to Trading Binary Options

and More Examples

95

Gold Binary Examples

96

Copper Binary Examples

99

PART IV

Binary Options Trading Strategies

CHAPTER 8

Volatility Trading Explained

Taking a Volatility Long Position (Buying Volatility)

105
107
108

Regulating Success Probability and Payout with Strike Prices 111
Taking a Volatility Short Position (Selling Volatility)

113

Regulating Range and Payout with Strike Prices

116

Max Loss, Collateral, and Max Profit Summary Table

120


Contents

ix

CHAPTER 9

Binary Option Behavior as
Expiration Approaches

123

Understanding Delta

123

Delta and Price

127

CHAPTER 10 Technical Trading Strategies with

Binary Options

129

Support and Resistance

130

Breakout Trading

135

CHAPTER 11 Fundamental Trading Strategies
with Binary Options

139

News Releases

139

Political Events

144

Speculating on Actual News Releases

147

Economic Data Releases that You Can Speculate On

149

PART V

153

Creating Your Binary Options Strategy

CHAPTER 12 Systems with Binary Options

155

Finding Your Edge

155

Proper Trading System Development

156

Back-Testing Binary Options Strategies

158

Three Back-Testing Rules

162

CHAPTER 13 Negative Emotions

165

Greed and Fear

166

How to Handle Negative Emotions

166

Find the Right System for You

168

Practical Steps to Mitigate the Negative Emotions

175

CHAPTER 14 Risk Management

183

The Process

184

Determining Position Size

185

x

CONTENTS

Risk Management on Option Spreads

190

Relationship between Position Size and Trading Psychology

199

Handling Unexpected Market Volatility

199

Benefits of Binary Options on Trading Psychology

202

Discipline of Expiration

206

PART VI

209

Managing Your Binary Options Account

CHAPTER 15 Proactive System Improvement

211

System Cutoffs

212

Drawdown

212

Consecutive Losing Trades

215

Reinvestment Rate

216

Diversification and Account Distribution

220

Intersystem Diversification

220

Account Breakdown

221

PART VII Profiting with Volatility

223

CHAPTER 16 The Volatility Short Trading Rules

225

Premium Collection

226

Rule 1: Cut Off Your Losing Trades

231

Rule 2: Collect Enough Premium

234

Rule 3: Sell Far Enough Away from Market Price

240

Rule 4: Use Underlying Instruments that Revert to the Mean

242

Rule 5: Sell Options with Proper Duration until Expiration

244

Rule 6: Perform Additional Analysis in Order to Get a
Feel for Market Direction

246

Rule 7: Attempt to Make Your Market

255

Conclusion

256

Glossary

259

Index

263


Foreword

B

inary options are a relatively new and unique way to take part in the
financial markets. Over the past decade they have become popular
instruments in Europe and Asia, and more recently, over the past few
years, have not only gained acceptance, but have seen widespread growth
in the United States, particularly within the retail trading community.
One may ask, “Why, with all of the investment vehicles available,
stocks, futures, forex, options, exchange‐traded funds, and so on, would I
want to take a look at another contract type?” This is a legitimate question.
One of the main reasons traders may look to a contract like a binary
option is risk control. Any seasoned trader in any market knows that profitability on any given trade is secondary, but risk management on every trade
is mandatory and of the utmost concern. This is particularly true when participating in leveraged markets such as futures and currencies, where one
mistake can not only result in large losses, but in some cases, losses that
exceed the amount of capital in the trader’s account. This can create an
ugly scenario for any trader—the dreaded margin call. If you’re not familiar with this concept, just think of the reaction of Randolph and Mortimer
Duke at the end of the movie Trading Places and you may have a good idea
of the devastating effect a margin call can have.
In the case of a binary option, whether I am buying or selling, my risk
is always limited and 100 percent defined up front, before the order is submitted. What this means is that a trader can very closely manage the risk
on every trade. No matter what happens in the world while the trade is
on—geopolitical tensions, central bank announcements, natural disasters,
whatever the case—the investor cannot lose more than is put up for the
trade. No worries of margin calls or being margined out, and more importantly, no chance of your broker calling you up and telling you that you
have to deposit more funds—funds that you may not have.
Another reason to consider binary options is simply cost. Many of you
reading this may have wanted to speculate in the financial markets. You
may have been standing at the gas pump and thought, “I knew oil was going up.” Or perhaps you were reading the newspaper, saw something that
caught your eye, and said, “I think stocks are going up tomorrow.” Unfortunately for many, the cost of placing a trade in the traditional markets may
xi

xii

FOREWORD

just be too great. Whether it be because of large margin requirements, or
the risk of trading a single contract alone is just too great, you’ve been shut
out of the trading community.
If that is the case, binary options, because of the low barrier to entry, may offer you the opportunity to participate in markets you otherwise
wouldn’t have access to. Most importantly, you can now take part in these
markets while protecting yourself through the limited risk nature of these
contracts. Additionally, if you are a seasoned trader, you may look to binary
options as an alternative vehicle, giving you opportunity to trade in situations you otherwise wouldn’t take in the more traditional markets.
You may be saying to yourself, this sounds really good, but if it is so
good, why isn’t everyone doing this?
Well, one reason is that trading, in any market, is not easy. It is a skill
and, like any skill, takes time to develop. It is a path that one should start
down slowly, and trading, in and of itself, is a never‐ending process of
learning and trying to improve.
Another reason binary options have not become a household name is
simply that as a relatively new trading vehicle, there has been a severe lack
of quality material on the subject. Some information has been available;
however, it often took a great deal of digging to find it, and when one did,
it could be difficult to piece it all together and assemble into a sensible
format.
Thankfully, with the publication of Alex’s work on binary options, this
hindrance has become a thing of the past. The following pages in this book
provide a clear, concise guide to trading binary options. In a way, it is hard
for me to call this just a “book.” It is in fact a complete user manual, providing a step‐by‐step guide to trading binary options. Starting with the very basics and moving all the way through to advanced strategies, it offers what

will undoubtedly be a very valuable reference for traders of all levels.
Whether you’ve never placed a binary options trade—or, for that matter, a trade in any market—this course will give you a solid foundation from
which to enter the market with a full understanding of mechanics, price
movement, and, most important, risk.
Even if you’re an experienced binary options trader, this work will
likely provide new ideas and strategies to enhance your current trading
methodology. Even though I have studied binary options for several years,
the material covered here gave me new concepts to explore and opened my
eyes to looking at familiar concepts in a whole new light.
I hope you enjoy this work as much as I do and wish you much success
in all your endeavors.
Dan Cook
September 2012


Preface

E

xchange‐traded binary options are fixed‐risk/fixed‐reward instruments that are fairly simple to trade. They are distinctly different
from regular vanilla put/call options and they absolutely should not
be confused with over‐the‐counter binary options. In this guide, we will
cover what sets exchange‐traded binary options apart and explain to you
in great detail how they work.
Please read this guide very carefully and follow along with the examples provided. The text is deliberately packed with a ton of examples,
some of which may seem repetitive to you. The idea behind this is that
once you go through enough examples, you will be able to grasp the concept. In order to solidify the concepts even further, you can visit www
.traderschoiceoptions.com for more trade examples and even quizzes.
Once you are clear on the concept, you may find binary options to be simple to implement. You will also see that they have certain unique and clear
advantages that provide for potentially great trading opportunities.

This guide is beneficial for beginner, intermediate, and advanced traders who are not familiar with binary options.
If you are a beginner, all concepts are diligently explained, and you will
find a detailed glossary to cover all trading‐related terms that you may or
may not be familiar with. You certainly don’t need to be a mathematics genius to trade binary options. The only type of math really involved is basic
addition and subtraction. You really need to understand the concept, and
the rest will be easy, fun, and potentially rewarding—although, as with all
types of trading, there are always risks.
If you are an intermediate or an advanced trader, you should be able to
pick up the theory behind binary options pretty quickly. You may still want
to take a look at the basic sections of this guide, as the concepts that we
introduce build on one another. You should put a great deal of focus on the
sections that explain the theory and practice behind binary options. Once
you go through a number of examples and learn the key attributes of binary
options, you will see how they have certain unique features that, if used
correctly, can provide you with many great trading opportunities. By using
this guide with a demo trading account, you should be well on your way to
taking advantage of this great trading instrument.
xiii


xiv

PREFACE

After completing this intro course, you may want to take a look at our
strategy guide at www.traderschoiceoptions.com to give you some interesting trading strategies and systems that you can use with binary options.
The course is broken down into sections, and each section builds on
the previous one. The best way to approach this guide is to read it in order.

PART 1: INTRO TO BINARY OPTIONS

Here, you will learn the basics, like: What are binary options? Where are
they traded? What instruments are they traded on? How safe is your money
when you are trading them? How do they differ from other kinds of options?

PART 2: BINARY OPTIONS THEORY
Here, you will learn the theory behind binary options and how you can use
them to speculate on the markets. Among other aspects, you will cover
margin/collateral, expiration times, the mechanics of strike prices, and
how to read a binary option chain. Once you are clear on the concepts, you
can follow our trade examples to make sure that you understand the logic
behind binary options trades.

PART 3: TRADING BINARY OPTIONS
Here, you will learn how to actually trade binary options. You will learn
how to read price quotes and order tickets and how to enter and exit positions. You will learn the transaction costs associated with binary options
trading and will walk through placing a trade. Once you are clear on these
concepts, you can go through more trade examples to make sure that you
are ready to start trading binary options.

PART 4: BINARY OPTION TRADING STRATEGIES
Here, you will learn some directional and volatility trading strategies with
binary options using both technical and fundamental analysis. With directional trading, you can simply speculate on the underlying asset’s price to
move in one direction or another.


Preface

xv

The great factor of volatility trading strategies is that you can speculate on the underlying asset to stay within a certain range or go outside of

a range by expiration. This allows you a lot more options and flexibility in
your trading strategies. In order to trade volatility vanilla put/call options,
trading accounts require relatively high deposits; however, binary options
open up the world of volatility trading to you with only a $100 deposit for
every contract traded.

PART 5: CREATING YOUR BINARY OPTIONS STRATEGY
Here, you will learn all about how binary options can be extremely beneficial for setting up a trading system. Binary options can help mitigate the
effects of emotion and make calculating potential risks and rewards very
straightforward. In addition, this section will teach you about some of the
basic trading strategies that you can use with binary options. Long, short,
range‐bound, breakout‐bound—the list goes on and on. The advantages of
trading binaries are endless.

PART 6: MANAGING YOUR BINARY OPTIONS ACCOUNT
Here, you will learn that, as with any trading account, there is a large amount
of work involved with a binary options account. However, it doesn’t have to
be very difficult or stressful if you follow our guidelines to control your risk
and protect your gains. This section will teach you about many aspects of
risk management as they pertain to binary options. Before you start trading, be sure to study this section.

PART 7: PROFITING WITH VOLATILITY
Here, you will learn about one of the most potentially profitable ways to trade
binary options: premium collection. This allows you to make money off of instruments doing what they often already do: staying where they are. By using
our descriptions of both the basics and the complexities of premium collection, you can set up a trading system that is reliable, robust, and successful.

So strap yourself in and get ready to learn about a new trading instrument
that can provide you with endless possibilities and great opportunity.

Acknowledgments

F

irst of all, I want to thank my father, Boris Nekritin, for getting me in
the trading game many years ago. Without him, I would never have
accomplished even one tenth of what I have accomplished, and I
certainly would never have been able to write this book. There are many
other people who deserve acknowledgment; the list includes but is not limited to the following: Dan Antonuccio, for pretty much managing all of my
projects and, as usual, putting everything together to turn my ideas into
reality; Eddie Kwong, who is a great friend and one of the most connected
guys I know in the trading industry, for putting me in touch with Wiley and
teaching me a ton about the business; Dan Cook, who is the real expert in
binaries, for patiently answering all of my complex questions about the
product; Abe Cofnas, who is one of the most knowledgeable and enthusiastic traders I have met, for getting me excited about binary options in
the first place; Patrick Tobin and Even Nelson, who were a lot of help with
the writing and many of the images in the book; the team at Wiley—Evan
Burton, Meg Freeborn, and Simone Black—for believing in the idea and
making the book a reality. Of course, my parents Nina and Boris Nekritin
for unconditional love and support in everything I do. And last, but certainly not least, my fiancée, Kendra, for helping me stay focused with her
love and support.

xvii


Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin.
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

PART I

Introduction to
Binary Options

T

his section will provide you with an overview and discussion of the
main benefits of binary option trading.

What You Will Learn:













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1

Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin .
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

CHAPTER 1

What Are
Binary Options?

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buyer or seller will purchase or sell a specific asset for a specific price at
a specific time in the future. Investors trade futures contracts to speculate
for profit and to hedge their assets. One of the benefits of trading futures
is that traders don’t have to physically buy a certain commodity in order to
3


4

BINARY OPTIONS

speculate on its price movements. They can simply enter their trade with a
smaller amount of cash on margin.
Futures contracts are traded on an exchange, and their price typically
moves with the price of the underlying asset. Since traders are speculat
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lower than the spot price.
All futures contracts have specific expiration dates that vary by the as
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5

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NBEF
VQ
PG

MBSHF
QVCMJDMZ
USBEFE
DPNQBOJFT
UIBU
USBEF
PO
FJUIFS
UIF

/:4&
PS
UIF
/BTEBR

t
US Tech 100 (Nasdaq Futures).
'VUVSFT
CBTFE
PO
UIF
/BTEBR


JOEFY
5IF
/BTEBR

JT
BO
JOEFY
DPNQPTFE
PG
UIF

MBSHFTU

NPTU

BDUJWFMZ
USBEFE
64
DPNQBOJFT
MJTUFE
PO
UIF
/BTEBR
TUPDL
FYDIBOHF

5IF
/BTEBR
JT
B
TUPDL
FYDIBOHF
UIBU
JT
USBEJUJPOBMMZ
XIFSF
NBOZ
IJHIĄ
UFDI
TUPDLT
BSF
USBEFE

t
US SmallCap 2000 (Russell 2000 futures). Futures based on the
3VTTFMM

JOEFY
5IF
3VTTFMM

JT
BO
JOEFY
NFBTVSJOH
UIF
QFS
GPSNBODF
PG


iTNBMMĄDBQw
QVCMJDMZ
USBEFE
DPNQBOJFT
4NBMMĄDBQ

SFGFST
UP
UIF
OVNCFS
PG
PVUTUBOEJOH
PXOFE

TIBSFT
PG
B
DPNQBOZ

BOE

in this case the companies are small.

t
FTSE (Liffe FTSE 100 futures).
'VUVSFT
CBTFE
PO
UIF
'54&

JOEFY

5IF
'54&

JOEFY
JT
BO
JOEFY
PG
CMVFĄDIJQ
MBSHF
DPNQBOJFT

TUPDLT

PO
UIF
-POEPO
4UPDL
&YDIBOHF

t
Germany 30 (Eurex Dax futures).
'VUVSFT
CBTFE
PO
UIF
%"9

JOEFY

5IF
%"9

JT
BO
JOEFY
PG
UIF

MBSHFTU
(FSNBO
DPNQBOJFT
USBEFE
PO

UIF
'SBOLGVSU
4UPDL
&YDIBOHF

t
Japan 225 (Nikkei 225 futures).
'VUVSFT
CBTFE
PO
UIF
/JLLFJ


JOEFY
5IF
/JLLFJ

JOEFY
JT
NBEF
VQ
PG
+BQBOT
UPQ

DPNQBOJFT

PO
UIF
5PLZP
4UPDL
&YDIBOHF

t
Korea 200 (KOSPI 200 futures).
'VUVSFT
CBTFE
PO
UIF
,041*


JOEFY

XIJDI
JT
NBEF
VQ
PG
UIF

MBSHFTU
DPNQBOJFT
PO
UIF
,PSFBO

&YDIBOHF

Commodity Futures
Commodities are physical goods, such as oil, corn, or gold. Commodity
futures are a financial instrument that can be used to speculate or hedge on
various physical commodities.
Commodity futures are usually priced slightly higher than the spot
commodity in order to account for the convenience that the futures offer
to the trader. Commodity futures are exchange traded and typically change

along with the price of the underlying.


6

BINARY OPTIONS

-FUT
UBLF
B
MPPL
BU
B
CJOBSZ
PQUJPO
USBEF
PO
B
DPNNPEJUZ
GVUVSF
-FUT
TBZ
UIBU
HPME
GVUVSFT
BSF
DVSSFOUMZ
USBEJOH
BU

QFS
P[
BOE

ZPV
UIJOL
UIF
HPME
GVUVSFT
BSF
HPJOH
UP
SFBDI

MBUFS
UPEBZ
:PV
DBO
CVZ

POF
EBJMZ
HPME
CJOBSZ
PQUJPO
DPOUSBDU
XJUI
B
TUSJLF
QSJDF
PG

8JUI
UIJT

binary option an assumption is made that at the end of the day the futures
price will be above 1100. At the end of the day the gold futures are trading
at 1100 and your binary options contract yields a profit.
Binary options are available on the following commodity futures:

t
Crude oil futures. Futures contracts based on current price if you were
to buy or sell physical crude oil. Crude oil is the commodity that is used
to produce heating oil and gasoline. Crude oil futures have contracts
that expire each calendar month.

t
Natural gas futures. Futures contracts based on the current price if you
XFSF
UP
CVZ
PS
TFMM
BDUVBM
OBUVSBM
HBT
/BUVSBM
HBT
JT
VTFE
UP
IFBU
IPNFT

/BUVSBM
HBT
GVUVSFT
IBWF
DPOUSBDUT
UIBU
FYQJSF
FBDI
DBMFOEBS
NPOUI

t
Gold futures. Futures contracts based on the current price if you were
UP
CVZ
PS
TFMM
QIZTJDBM
HPME
1IZTJDBM
HPME
JT
VTFE
UP
NBLF
KFXFMSZ
BOE

JT
BMTP
VTFE
JO
NBOVGBDUVSJOH
(PME
GVUVSFT
IBWF
DPOUSBDUT
UIBU
FYQJSF

in February, April, June, August, and December.

t
Silver futures. Futures contracts based on current price if you were to
CVZ
PS
TFMM
QIZTJDBM
TJMWFS
1IZTJDBM
TJMWFS
JT
VTFE
UP
NBLF
KFXFMSZ
BOE

is also used in manufacturing. Silver futures have contracts that expire
in March, May, July, September, and December.

t
Copper futures. Futures contracts based on the current price if you
were to buy or sell physical copper. Physical copper is used in elec
tronics, manufacturing, and architecture. Copper futures have con
tracts that expire in March, May, July, September, and December.

t
Corn futures. Futures contracts based on the current price if you were
to buy or sell physical corn. For the most part, the corn on which these
GVUVSFT
BSF
CBTFE
JT
VTFE
UP
GFFE
MJWFTUPDL
$PSO
GVUVSFT
IBWF
DPOUSBDUT

that expire in March, May, July, September, and December.

t
Soybean futures. Futures contracts based on the current price if you
XFSF
UP
CVZ
PS
TFMM
QIZTJDBM
TPZCFBOT
4PZCFBOT
BSF
UVSOFE
JOUP
DPPLJOH

PJM
BOE
ýPVS

BOE
DBO
CF
VTFE
UP
GFFE
MJWFTUPDL
4PZCFBO
GVUVSFT
IBWF

contracts that expire in January, March, May, July, August, September,
BOE
/PWFNCFS
:PV
DBO
åOE
NBOZ
HSFBU
XFCTJUFT
UP
WJFX
DIBSUT
PG
WBSJPVT
GVUVSFT

DPOUSBDUT
BOE
BMTP
TUSFBNJOH
RVPUFT
XXXCBSDIBSUDPN
JT
BO
FYDFMMFOU

free charting website that will display delayed price charts of almost every
EJGGFSFOU
BTTFU
DMBTT

GSPN
TUPDLT
UP
DPNNPEJUZ
GVUVSFT


7

What Are Binary Options?

www.forexpros.com/ is an excellent resource that allows you to view free
TUSFBNJOH
RVPUFT
GPS
BMNPTU
FWFSZ
BTTFU
DMBTT
JODMVEJOH
TUPDLT
BOE
GVUVSFT

Spot Forex
#FGPSF
HPJOH
JOUP
FYBNQMFT
PG
CJOBSZ
PQUJPOT
PO
TQPU
NBSLFUT

ZPV
TIPVME

CF
DMFBS
PO
XIBU
B
TQPU
NBSLFU
JT
5IF
TQPU
NBSLFU
PS
DBTI
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QVC
MJD
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XIJDI
åOBODJBM
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TVDI
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BOE

CPOET

PS
DPNNPEJUJFT
MJLF
HPME
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TJMWFS

BSF
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5IF
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JT

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PS
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PO
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BU
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DPVME
CF
DPOTJEFSFE
B
NBSLFU
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HPPET
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CBTFE
PO
UIF
QSJDF
JO

UIF
NBSLFU
SJHIU
OPX
BOE
BSF
CPVHIU
BOE
TPME
JNNFEJBUFMZ
Spot forex is the abbreviation for the foreign exchange or currency
NBSLFU
5IF
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NBSLFU
JT
DPOTJEFSFE
B
TQPU
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"
TQPU
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PG
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åOBODJBM
JOTUSVNFOU
3FUBJM
TQPU

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åSNT
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CBOLT
0OF
XBZ
UP
MPPL
BU
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BSF
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on the economies of various countries.
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RVPUFE
JO
QBJST

TVDI
BT
(#164%
PS
64%+1:

5IF
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UIFZ
BSF
RVPUFE
JO
QBJST
JT
UIBU
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FWFSZ
GPSFJHO
FYDIBOHF
USBOT
action you are simultaneously buying one currency and selling the other.
)FSF
JT
BO
FYBNQMF
PG
B
GPSFJHO
FYDIBOHF
SBUF
GPS
UIF
#SJUJTI
QPVOE
WFSTVT

UIF
64
EPMMBS
(#164%


5P
TFF
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RVPUFT

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XXXUSBEFSTDIPJDFPQUJPOTOFU

4FF
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5IF
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UP
UIF
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PG
UIF
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iw

JT
LOPXO
BT
UIF
CBTF

DVSSFODZ
JO
UIJT
FYBNQMF

UIF
#SJUJTI
QPVOE

XIJMF
UIF
POF
PO
UIF
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UIF
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UIJT
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UIF
64
EPMMBS

8IFO
CVZJOH

UIF
FYDIBOHF
SBUF
UFMMT
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IPX
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JO
VOJUT
PG
UIF
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UP
CVZ
POF
VOJU
PG
UIF
CBTF
DVSSFODZ
*O
UIF


GBP/USD = 1.7500

Base Currency

Quote Currency

EXHIBIT 1.1 Advantages and Disadvantages of Binary Options


8

BINARY OPTIONS

QSFDFEJOH
FYBNQMF

ZPV
IBWF
UP
QBZ

64
EPMMBST
UP
CVZ
POF
#SJUJTI

pound.
8IFO
TFMMJOH

UIF
FYDIBOHF
SBUF
UFMMT
ZPV
IPX
NBOZ
VOJUT
PG
UIF

RVPUF
DVSSFODZ
ZPV
HFU
GPS
TFMMJOH
POF
VOJU
PG
UIF
CBTF
DVSSFODZ
*O
UIF

FYBNQMF

ZPV
XJMM
SFDFJWF

64
EPMMBST
XIFO
ZPV
TFMM
POF
#SJUJTI

pound.

-FUT
MPPL
BU
BO
FYBNQMF
PG
B
CJOBSZ
PQUJPOT
USBEF
PO
TQPU
GPSFY
-FUT
TBZ
UIBU
UIF
&6364%
JT
DVSSFOUMZ
USBEJOH
BU

:PV
UIJOL
UIF

FVSP
JT
HPJOH
UP
EFQSFDJBUF
HP
EPXO

JO
WBMVF
SFMBUJWF
UP
UIF
64
EPMMBS
BOE

XJMM
EFDMJOF
UP

MBUFS
UPEBZ
:PV
EFDJEF
UIBU
ZPV
XBOU
UP
UBLF
B
QPTJ
UJPO
PO
UIF
&6364%
CZ
TFMMJOH
POF
EBJMZ
&6364%
CJOBSZ
PQUJPO
DPOUSBDU

XJUI
B
TUSJLF
QSJDF
PG

8JUI
UIJT
CJOBSZ
PQUJPO
BO
BTTVNQUJPO
JT
NBEF

UIBU
BU
UIF
FOE
PG
UIF
EBZ
UIF
&6364%
XJMM
CF
USBEJOH
CFMPX

"U
UIF

FOE
PG
UIF
EBZ
UIF
&6364%
JT
USBEJOH
BU

#FDBVTF
ZPV
XFSF
DPSSFDU

in your assumption, your binary option contract yields a profit.
Binary options are available on the following currency pairs:

t
AUD/USD.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
"VTUSBMJBO
EPMMBS
BOE
64

dollar.

t
EUR/USD.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
FVSP
BOE
64
EPMMBS

t
EUR/JPY. The exchange rate between the euro and Japanese yen.

t
GBP/JPY. The exchange rate between the British pound and
Japanese yen.

t
GBP/USD.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
#SJUJTI
QPVOE
BOE
64

dollar.

t
USD/CAD.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
64
EPMMBS
BOE
$BOBEJBO

dollar.

t
USD/CHF.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
64
EPMMBS
BOE
4XJTT
GSBOD

t
USD/JPY.
5IF
FYDIBOHF
SBUF
CFUXFFO
UIF
64
EPMMBS
BOE
+BQBOFTF
ZFO

Economic Data Releases
#JOBSZ
PQUJPOT
DPOUSBDUT
BSF
BMTP
BWBJMBCMF
PO
LFZ
FDPOPNJD
EBUB
SFMFBT
es. Before we go into examples of binary options on economic events, we
TIPVME
åSTU
EJTDVTT
XIBU
XF
NFBO
CZ
iFDPOPNJD
FWFOUTw
BOE

NPSF
JNQPS
tant, what an economic event is.

8IBU
BSF
FDPOPNJD
FWFOUT
5ISPVHIPVU
UIF
ZFBS
UIF
64
HPWFSONFOU

JTTVFT
WBSJPVT
SFQPSUT
UIBU
EFUBJM
UIF
PWFSBMM
IFBMUI
PG
UIF
64
FDPOPNZ

5IFTF
SFQPSUT
BSF
SFMFBTFE
CZ
EFQBSUNFOUT
PG
UIF
64
HPWFSONFOU
BOE
SF
WPMWF
BSPVOE
TFWFSBM
DPNQPOFOUT
UP
UIF
64
FDPOPNZ
4PNF
PG
UIFTF
DPN
QPOFOUT
BSF
DPOTVNFS
TQFOEJOH
XIFUIFS
PS
OPU
QFPQMF
BSF
CVZJOH
HPPET


KPCMFTT
DMBJNT
UIF
OVNCFS
PG
DVSSFOU
VOFNQMPZFE
JOEJWJEVBMT

MBCPS
SF
QPSUT
XIFUIFS
DPNQBOJFT
BSF
IJSJOH

BOE
JOUFSFTU
SBUFT
UIF
JOUFSFTU
SBUFT

CBOLT
DIBSHF
GPS
MPBOT



What Are Binary Options?

9

www.forexfactory.com is a great resource to learn more about eco
nomic events.
-FUT
UBLF
B
MPPL
BU
B
CJOBSZ
PQUJPOT
USBEF
PO
BO
FDPOPNJD
FWFOU
-FUT
TBZ
UIBU
ZPV
BSF
JOUFSFTUFE
JO
UBLJOH
B
QPTJUJPO
PO
UIF
KPCMFTT

DMBJNT
SFQPSU
UIBU
XJMM
CF
DPNJOH
PVU
PO
5IVSTEBZ
:PV
UIJOL
UIBU
GFXFS

QFPQMF
IBWF
åMFE
GPS
VOFNQMPZNFOU
CFOFåUT
BOE
UIBU
UIF
KPC
NBSLFU
BT
B

XIPMF
IBT
CFFO
JNQSPWJOH
-BTU
XFFL


OFX
VOFNQMPZNFOU
DMBJNT

XFSF
åMFE

BOE
ZPV
GFFM
UIBU
UIJT
XFFL
UIF
OVNCFS
XJMM
CF
MFTT
:PV
TFMM
POF

KPCMFTT
DMBJNT
CJOBSZ
PQUJPO
XJUI
B
TUSJLF
QSJDF
PG



8JUI
UIJT
CJOBSZ
PQUJPO
UIF
BTTVNQUJPO
JT
NBEF
UIBU
PO
5IVSTEBZ
UIF

KPCMFTT
DMBJNT
OVNCFS
XJMM
CF
MFTT
UIBO


5IF
KPCMFTT
DMBJNT
SF
QPSU
JT
JTTVFE
BOE
BDDPSEJOH
UP
UIF
SFQPSU
UIFSF
XFSF


OFX
VOFN
QMPZNFOU
DMBJNT
:PV
XFSF
DPSSFDU
JO
BTTVNJOH
UIBU
UIF
KPCMFTT
DMBJNT

XPVME
CF
MFTT
UIBO


BOE
UIFSFGPSF
ZPVS
CJOBSZ
PQUJPO
FYQJSFT
GPS

a profit.
:PV
BSF
BCMF
UP
USBEF
CJOBSZ
PQUJPOT
PO
UIF
GPMMPXJOH
FDPOPNJD
EBUB

releases:

t
Federal funds rate.
64
CBOLT
BSF
PCMJHBUFE
UP
NBJOUBJO
DFSUBJO
MFWFMT

of reserve funds at all times. These reserves are either held with the
'FEFSBM
3FTFSWF
#BOL
UIF
DFOUSBM
CBOL
GPS
UIF
6OJUFE
4UBUFT

PS
JO

DBTI
MPDBUFE
JO
UIFJS
WBVMUT
4PNFUJNFT
XIFO
B
CBOL
JTTVFT
B
MPBO
JU

EFQMFUFT
QBSU
PG
UIJT
SFRVJSFE
SFTFSWF
8IFO
UIJT
PDDVST
UIF
CBOL
NVTU

CPSSPX
GVOET
GSPN
BOPUIFS
CBOL
XJUI
B
TVSQMVT
5IF
GFEFSBM
GVOET
SBUF

JT
UIF
JOUFSFTU
SBUF
BU
XIJDI
UIFTF
CBOLT
MFOE
GVOET
UP
FBDI
PUIFS
5IF

federal funds target rate is determined by a meeting of the members of
UIF
'FEFSBM
0QFO
.BSLFU
$PNNJUUFF

UIF
DPNNJUUFF
JO
DIBSHF
PG
UIF

64
HPWFSONFOUT
NPOFZ
TVQQMZ
BOE
JOUFSFTU
SBUFT
5IF
GFEFSBM
GVOET

rate is released once a month.

t
Jobless claims
5IJT
JT
B
SFQPSU
UIBU
JT
JTTVFE
CZ
UIF
64
%FQBSUNFOU

PG
-BCPS
PO
5IVSTEBZ
PG
FBDI
XFFL
5IF
KPCMFTT
DMBJNT
SFQPSU
USBDLT

how many individuals have filed for new unemployment benefits dur
JOH
UIF
QBTU
XFFL
+PCMFTT
DMBJNT
BSF
BO
JNQPSUBOU
XBZ
UP
HBVHF
UIF

64
KPC
NBSLFU
.PSF
QFPQMF
åMJOH
GPS
VOFNQMPZNFOU
JT
BO
JOEJDBUJPO

UIBU
UIFSF
BSF
GFXFS
KPCT
'FXFS
QFPQMF
åMJOH
GPS
VOFNQMPZNFOU
JT
BO

JOEJDBUJPO
UIBU
UIFSF
BSF
NPSF
KPCT

t
Nonfarm payrolls.
5IJT
JT
B
SFQPSU
JTTVFE
CZ
UIF
64
#VSFBV
PG
-BCPS

Statistics on the first Friday of each month. This report was created to
EFTDSJCF
UIF
UPUBM
OVNCFS
PG
64
FNQMPZFFT

FYDMVEJOH
HPWFSONFOU

employees, nonprofit employees, and farm employees. This report also
FTUJNBUFT
UIF
BWFSBHF
XFFLMZ
FBSOJOHT
PG
BMM
FNQMPZFFT

FYDMVEJOH

UIPTF
PVUMJOFE
BCPWF
5IJT
SFQPSU
FTTFOUJBMMZ
MPPLT
BU
XIFUIFS
CVTJ
nesses are hiring people or not.


10

BINARY OPTIONS

:PV
DBO
HFU
B
CSFBLEPXO
PG
BMM
VQDPNJOH
SFMFBTFT
XJUI
BMM
EFUBJMT
PO

our companion site, www.traderschoiceoptions.net.

BINARY OPTIONS VS. CBOE (VANILLA)
PUT/CALL OPTIONS
Traditional options are derivative instruments that are exchange traded. An
option gives the owner the right to buy or sell the underlying instrument at
a particular price. Options are traded on various instruments such as indi
WJEVBM
TUPDLT

GVUVSFT

DVSSFODJFT

BOE
JOEFYFT
There are two basic types of options: a call option and a put option.
8IFO
ZPV
CVZ
PS
TFMM
BO
PQUJPO

ZPV
FOUFS
JOUP
B
DPOUSBDU
UIBU
IBT
BO
FYQJ
SBUJPO
EBUF
+VTU
MJLF
XJUI
CJOBSZ
PQUJPOT

USBEFST
DBO
CVZ
BOE
TFMM
UIFN
BOZ

time before expiration.
)FSF
JT
IPX
UIF
UXP
UZQFT
PG
DPOUSBDUT
XPSL

t
Call option. A call option gives the owner the right to purchase the un
EFSMZJOH
JOTUSVNFOU
BU
B
QBSUJDVMBS
QSJDF
LOPXO
BT
UIF
TUSJLF
QSJDF

BOZ

time before expiration. As an options trader you would buy a call option
JG
ZPV
UIJOL
UIF
QSJDF
PG
UIF
VOEFSMZJOH
JOTUSVNFOU
XJMM
HP
VQ
*G
UIF
VO
derlying instrument goes up in price, then the owner can purchase the
JOTUSVNFOU
BU
UIF
MPXFS
TUSJLF
QSJDF
BOE
TFMM
JU
PO
UIF
PQFO
NBSLFU
UP
MPDL

in a profit. If the underlying instrument does not go up in price above the
PQUJPOT
TUSJLF
QSJDF

UIFO
UIF
PQUJPO
XJMM
FYQJSF
XPSUIMFTT
&YIJCJU

EFQJDUT
UIF
QSPåU
BOE
MPTT
PG
B
MPOH
WBOJMMB
DBMM
USBEF

5IF
YĄBYJT
SFQSFTFOUT
UIF
QSJDF
PG
UIF
VOEFSMZJOH
BU
FYQJSBUJPO
5IF

ZĄBYJT
SFQSFTFOUT
QSPåU
BOE
MPTT
If you believe that the underlying instrument will not reach a
DFSUBJO
TUSJLF
QSJDF

ZPV
DBO
TFMM
B
DBMM
PQUJPO
8IFO
ZPV
EP
UIJT
ZPV

receive the options premium, but in return you have an obligation
to sell the underlying at a particular price. If the underlying stays
below the price, no one will want to buy the underlying from you
BU
UIF
TUSJLF
QSJDF
BOE
ZPV
XJMM
TJNQMZ
HFU
UP
LFFQ
UIF
QSFNJVN
ZPV

DPMMFDUFE
)PXFWFS

JG
UIF
VOEFSMZJOH
JOTUSVNFOU
HPFT
VQ
JO
QSJDF

BCPWF
UIF
TUSJLF
QSJDF

ZPV
XJMM
CF
PCMJHBUFE
UP
TFMM
JU
UP
UIF
PXOFS

PG
UIF
PQUJPO
BU
UIF
MPXFS
TUSJLF
QSJDF
5IFSFGPSF

ZPV
XJMM
JODVS

UIF
MPTT
PG
UIF
EJGGFSFODF
CFUXFFO
UIF
NBSLFU
QSJDF
PG
UIF
VOEFSMZJOH

BOE
UIF
TUSJLF
QSJDF
PG
UIF
DBMM
PQUJPO

t
Put option. A put option gives the owner the right to sell the underly
JOH
JOTUSVNFOU
BU
BO
BHSFFEĄVQPO
QSJDF
UIF
PQUJPOT
TUSJLF
QSJDF

BOZ



11

What Are Binary Options?

Profit

Strike Price

Price at
Expiration

Maximum Risk = Premium

Loss

Loss = Premium (if price <= strike price upon expiration)

EXHIBIT 1.2 P&L Graph of a Long Call

time before expiration. As an options trader you buy a put option if
ZPV
UIJOL
UIF
QSJDF
PG
UIF
VOEFSMZJOH
JOTUSVNFOU
XJMM
HP
EPXO
*G
UIF

VOEFSMZJOH
JOTUSVNFOU
HPFT
EPXO
JO
QSJDF
CFMPX
UIF
TUSJLF
QSJDF

ZPV

DPVME
CVZ
UIF
JOTUSVNFOU
BU
NBSLFU
WBMVF
BOE
TFMM
JU
BU
UIF
TUSJLF
QSJDF


UIVT
MPDLJOH
JO
ZPVS
QSPåU
&YIJCJU

EFQJDUT
UIF
QSPåU
BOE
MPTT
PO
B
MPOH
WBOJMMB
QVU
USBEF

5IF
YĄBYJT
SFQSFTFOUT
UIF
QSJDF
PG
UIF
VOEFSMZJOH
BU
FYQJSBUJPO
5IF

ZĄBYJT
SFQSFTFOUT
QSPåU
BOE
MPTT
If you believe that the underlying instrument will not drop below
UIF
TUSJLF
QSJDF

UIFO
ZPV
DBO
TFMM
B
QVU
PQUJPO
8IFO
ZPV
TFMM
UIF
QVU

option you will collect the price of the option. In return you now have
UIF
PCMJHBUJPO
UP
CVZ
UIF
VOEFSMZJOH
BU
UIF
TUSJLF
QSJDF
*G
UIF
VOEFSMZJOH

TUBZT
BCPWF
UIF
TUSJLF
QSJDF

ZPV
TJNQMZ
DPMMFDU
UIF
QSFNJVN
)PXFWFS


JG
UIF
VOEFSMZJOH
ESPQT
CFMPX
UIF
TUSJLF
QSJDF

ZPV
XJMM
IBWF
UP
CVZ
UIF

VOEFSMZJOH
BU
B
QSJDF
UIBU
JT
IJHIFS
UIBO
JUT
NBSLFU
QSJDF

UIVT
JODVSSJOH

B
MPTT
PG
UIF
EJGGFSFODF
CFUXFFO
UIF
TUSJLF
QSJDF
BOE
UIF
NBSLFU
QSJDF
Most options are not exercised at the expiration date and are simply
bought and sold prior to expiration. Options on indexes are never exer
DJTFE
UIFZ
BSF
TJNQMZ
TFUUMFE
JO
DBTI
0QUJPO
USBEJOH
JT
B
[FSPĄTVN
HBNF


meaning for every winner there is a loser. By trading regular options, trad
FST
DBO
DSFBUF
B
QMFUIPSB
PG
TUSBUFHJFT
UP
TVJU
UIFJS
TUZMF
BOE
SFRVJSFNFOUT

There are, however, some issues associated with trading regular options.
0OF
LFZ
JTTVF
JT
UIBU
XIFO
ZPV
TFMM
UIF
PQUJPO
ZPV
IBWF
UP
QVU
VQ
NBS
HJO
BOE
ZPV
UIFPSFUJDBMMZ
IBWF
VOMJNJUFE
SJTL
5IJT
XBZ
ZPV
DBO
MPTF
NPSF