Binary options trading is also interesting for many speculative traders and investors because of the high return opportunities. But where there is an opportunity, there is also a risk - even with binary options.
If you speculate with binary options, you are taking a relatively high risk, but this is also offset by extremely high potential profits in a short time. The principle of binary options cannot be beaten in terms of simplicity. The trader determines whether the price will rise or fall within the term of the option, for example two hours. The desired capital investment is determined and according to the market assessment, the trader buys a call or put option on rising or falling prices. At the most, the capital investment can be lost. Some brokers offer up to 15% repayment protection that protects against total loss.
High yield options for high returns
The binary options are even greater opportunities for special ones High yield options that enable returns of up to 500%. One can imagine that these options are of course also associated with a higher risk. However, even with high-yield options, the maximum stake can be lost. So what is the higher risk?
There is another factor to consider, namely the probability of success, which is also known by traders as the hit rate (p). In combination with the expected profit (G) and the maximum risk (R), this provides the expected value (e), i.e. the expected profit per trade. Mathematically, it looks like this:
e = (G) x (p) - (R) x (1-p)
Looks a bit complicated, but it is very easily. An example:
A trader buys a high-yield call option on the currency pair EUR / USD with 350% yield in the binary options trading mode one-touch (a certain target price must be reached during the term). This trading mode is available, for example, from broker 24option. The current price is 1.3010, the target price is 1.3028. 100 euros will be invested in the binary option. The euro has to reach 1.3028 at some point during the term (let's assume 30 minutes), i.e. increase by 18 pips so that the trader makes a profit.
So what is the expected value of the trader in this trade?
Let's assume that EUR / USD has been on an uptrend for a few days, and the important resistance at 1.30 was cracked. This suggests that prices tend to rise. Based on his chart analysis and experience, the trader estimates the chance of around 70% that the euro will continue to rise over the course of the day. However, the binary option only has a runtime of 30 minutes. The trader therefore corrects the probability of success downwards to take the time factor into account accordingly. In order to accept the worst case, he only has a 30% probability that the EUR / USD will reach the target within 30 minutes. In 30% of the cases, the trader makes a profit of 350 euros in the binary option (350% based on 100 euros stake) and in 70% of the cases he loses the stake of 100 euros. That doesn't sound very promising at first, but in the long term it is a profitable strategy with a positive expected value (e). We use the formula above to calculate the average profit per trade. What is important for the trader is not the result of a trade, but the long-term profitability.
e = 350 x 0.3 - 100 x 0.7 = 35
Based on a stake of 100 euros, this means an average profit of 35 euros. With this strategy, the trader achieves an average of 35% profit per trade over a large number of trades - a very high return. Of course, in addition to a large portion of discipline, the implementation of such a strategy also requires corresponding empirical values in order to be able to determine the hit rates as precisely as possible.