The Importance of Fundamental Analysis in Binary Options

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What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

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The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

Analysis and its types in binary options

Profitable binary options trading is not possible without quality market analysis. It would seem, options trading is simple, just need to make a bet on whether the price of the asset will increase or go down. But how do you know which direction to choose: up or down? And when to open the option that it certainly closed with a profit? For this you need to understand which factors and patterns affect the price change. And market analysis of option will help in this.

Market analysis is and its purpose

Market analysis is an analysis of the situation on the currency, stock or commodity market in order to predict the direction of prices or other market asset and find the best moments to open trades.

How to perform the analysis of binary options

Binary options is a derivative market instrument, which is based on a given underlying asset. It can be currency pairs, securities, stock indexes or commodity markets (for example, there are over 200 assets in Verum Option platform). Therefore, when talking about the binary options, the market analysis is meant on the specific underlying asset you want to trade.

For example, if you are trading options on stocks of Apple, you need to analyze the change of these shares, but if your underlying asset is gold, then you need to analyze the situation in the gold market.

There are two kinds of options analysis: fundamental and technical. Fundamental helps to predict the behavior of prices of market assets taking into account the influence of economics and politics, technical analysis is based directly on price chart data.

Fundamental analysis

The basic idea of fundamental analysis is that every cause brings a result, and if the world economy or politics, something important happens, it will affect the quotes.

Latest and most vivid example: on 23th of June 2020, the UK held a referendum on exit from the EU, after which the quotation of the pound sterling plummeted by almost of 6%. The United Kingdom became politically and economically unstable, and it is unprofitable for large investors to invest in its currency. And those who bet on the decline of the pound earned on this.

Of course, not only such a serious and rare events have an impact on the quotes of market assets. It could be statistics that are published regularly and are marked in the economic calendar. For example: Central Bank meetings and speeches of their representatives, the data on the labor market, inflation, business activity, GDP. Typically, when data is better than forecast, an asset increasing in price, and when the data is worse than forecast, the price of the asset falls.

For example, you opened an economic calendar and see that in an hour the publication of Eurozone GDP is expected. You only need to wait for news and see how it meets the forecasts. If GDP growth exceeded expectations, it is possible to open a call option for a rise in the Euro against the dollar, and if the actual value is “not held” to the forecast, the Euro is likely to fall, and you can make money on its decline.

Technical analysis

Technical analysis is based on the fact that the price behavior is always logical. And if you study the price chart and identify these patterns, you can predict that the price will rise or fall. Technical analysis can be carried out using only the graph (graphical analysis), or specific indicators (technical analysis).

Graphical analysis

Graphical analysis is good because it is the most obvious and logical. You just look at the price chart, find shapes that say about the continuation or reversal of the trend, and perform a trade.

Basic graphic shapes: triangle, rectangle, flag and pennant. They are all based on lines of support and resistance. To open a trade when the figure is fully formed, that is, when the support level or resistance level is broken.

Triangle – a figure of continuation of a trend, which is formed in a period of price consolidation. The triangle is ascending, descending, symmetrical and widening.

Rectangle — continuation or trend reversal, is formed after a strong price movement.

Flag and pennant — continuation patterns usually occur in periods of price consolidation, after which the trend resumes. First a “handle” of flag or pennant is formed — the price makes a sudden jump in the trend direction. Then price is either trading in a sideways pattern with parallel lines of support and resistance (the flag), or reduces oscillations, when the lines of support and resistance converge to a single point (the pennant).

Indicator analysis

Indicator analysis — chart analysis through indicators that help to determine the trend and to find entry points in the market.

Two main groups of indicators are trend-following indicators and oscillators. The trend are visible on the chart and indicate the presence and direction of a trend. These indicators are the most popular among traders as they are the least complicated for perception and interpretation. Trend indicators include Moving Average (MA), Alligator, Parabolik SAR, Bollinger Bands.

Oscillators or stochastics are used to determine the strength of the trend to tell when a reversal is possible. These are such indicators as MACD, Stochastic, Ichimoku, RSI. The oscillators are located below the main graph and are shown as curves, the intersection of which is the signal to open transaction.

However, it does not necessarily strain with the use of indicators. For example, in the Verum Option trading platform there is a tool for automated technical analysis – Strategy Advisor which is based on the trend indicators MA and Bollinger Bands, and RSI.

Risk management

In order to achieve success, the trader should follow the rules of risk management:

  • Open the transaction only when there is a market signal obtained as a result of fundamental or technical analysis.
  • An investment in 1 option should be no more than 3-5% of the deposit.
  • If you have three unprofitable trades in a row, stop and reconsider your trade.
  • if you see that the option is in the negative, use the management tools of the transaction to minimize loss.

For example, in the Verum Option platform there are tools “Rollover” and “Sale option”. You can use rollover to prolong the expiry of the option to give the deal a chance to become profitable, or prematurely sell the option at the current price.

Which way of analysis to choose?

Each trader decides it for himself, but the professionals recommend to carry out both fundamental and technical analysis of binary options. In some cases the appropriate fundamental analysis (for example, during important news releases), and in other works technical is the best.

Of course, the analysis of the market should be studied, but it’s pretty simple. To trade binary options it is even enough to have basic knowledge, that every beginner is able to learn.

Fundamental Analysis

Fundamental Analysis Guide

How to Use Financial Reports, News and Data to Improve your Trades

Fundamental analysis is a form of market analysis in which the analyst or trader seeks to conduct a thorough evaluation of an asset in order to determine that asset’s inherent value using economic

and political news surrounding the asset or the country of origin of the asset or market being evaluated.

Assets always have a market value and an inherent value. The market value is a function of the response of traders to the inherent value. If the inherent value of an asset differs from the market value, there is an opportunity for correction when a market moving news item is released. A news item causes a change to the fundamental or inherent value of an asset, which leads to a market response from traders and market participants viewing the asset. Their response now causes the market value of the asset to shift towards the inherent value of the asset.

Using an asset’s inherent value to compare with its market value so as to either buy or sell, or in the case of binary options, to buy a call or put contract, is the basis of the use of fundamental analysis.

Fundamental Analysis Guide:

The binary options market is different from other markets because in addition to determining the market response to a piece of news, the trader must also be able to determine the length of the effect of the news item. Furthermore, the response of the brokers to a news item when order flows are so much in one direction as to make it nearly impossible to match orders, is another factor that the trader must contend with. Let us look at how each factor can be handled in the fundamental analysis of the binary options assets.

Fundamental Analysis in Binary Options: Matters Arising

Some issues arise and must be looked at critically by the trader when conducting fundamental analysis in the binary options market.

a) What Fundamental Factors Affect the Various Asset Classes?

Four different asset classes are traded in the binary options market. It naturally follows that the factors that cause a change in the fundamentals of these assets will be different for every asset class.

For commodities, especially agricultural ones, factors such as weather patterns, drought, disease or civil conflict (affecting production and export) will impact prices.

For stocks, traders will be looking at things like earnings reports, mergers and acquisitions, company news, change of leadership, etc.

For currencies, the high-impact news items on the forex economic calendar will create the shift in asset fundamentals that produce trading opportunities.

Stock indices follow the movement of the listed stocks, so if there is a general sentiment in the markets or there is a wave of systemic shocks, the values of the index will be affected. Of all the assets, the movements of stock indices are the easiest to predict as they usually respond to the effects of the underlying stocks traded on them.

Typically, there is an initial spike, followed by a retracement and then a more sustained response to the news numbers in the direction of the initial spike as traders digest the news better. Those who want to trade binary options assets with fundamental analysis must as much as possible, avoid trading initial spikes and retracements for the reasons we shall give below. They are better off trading the response after the retracement. Not only is this the true response to the market news, but this is the more tradable part of the news response.

c) Broker Response to News Releases

News releases tend to force the big money traders in one direction. That is why there is an initial spike. While this is a trader’s paradise in the highly liquid forex markets, this is a broker’s nightmare in the binary options market. During an initial spike, most orders are flowing in one direction, and this cold outstrip the broker’s ability to fulfill all trade and payment obligations, as there is typically no counterparty trades to use in the settlements. So as not to crumble under the weight of fulfilling orders and settling payments from profitable trade single-handedly, most binary brokers would simply freeze the asset, making it unavailable for trading.

It is for this reason that traders are advised not to trade the initial spike, but rather to wait for the period of a more sustained response after the retracement. By then, frozen assets would become available for trading once more.

More About Adam

Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

Fundamental or Technical? Both!

Novice traders often wonder what should be their first steps, which strategy to choose and what to pay attention to when entering the global financial markets. One of the first things traders learn is that there are two distinct types of analysis — fundamental and technical. Each one has its advantages and disadvantages of its own. By combining them one might understand the markets better and estimate the future direction of the price movement with higher accuracy. In order to understand how to combine two types of analysis, we will first have to take a closer look at each of them and understand their distinct features.

Analysis types

Technical analysis is built around price chart analysis. Technical analysts use past price performance to draw certain conclusions and evaluate existing market conditions. By using support and resistance levels along with technical analysis indicators traders can determine optimal entry and exit points (when it is possible to open and close the deal). This analysis type can provide a plethora of useful information and help predict the direction of an upcoming trend. However, it can hardly tell what the price will be in the long run, as the price chart cannot provide extensive information on the future performance of an asset.

Fundamental analysis , on the other hand, is focused around the study of real-life events that can affect the asset price. A corporate news release can trigger a massive price swing. The direction of the latter will depend on the information provided in the said release. Good news (outstanding financial performance, new cost-cutting initiative, higher than expected growth prospects) positively affect intrinsic, in other words real, value of a company. Bad news (poor financial performance, negative press coverage) negatively affect intrinsic value and drag the market price down, as well. The same principles apply to currencies, commodities, ETFS and all exchange-traded assets.

How to combine?

Combining fundamental and technical analysis is not always easy, yet it can be useful in a number of ways. It is wise to keep track of recent trading volume and monitor the activity of other traders. A trader can use volume indicators to check the power of a prevailing trend — as a rule, trading volume goes up when a trend gains momentum. When the volume goes down, it can be a sign of an upcoming trend reversal. Market behavior is determined by the actions of individual traders. What other people think about the asset thus should be of utmost importance to you.

Traders who rely on fundamental analysis as their primary analysis tool may also incorporate technical indicators into their strategy. They can combine fundamental and technical principles. Traders can trace the connection between fundamental events and signals, received from technical indicators, and use it to spot certain patterns. As the market quite often tends to repeat itself, by being familiar with patterns you can get a competitive edge against other traders.

Conclusion

To sum it up, it is safe to say, that the two analysis methods can complement each other and do not have to compete for a place in your trading system. One of them relies heavily on the past performance of the market, the other is shifted towards future events. Both have their benefits as well as their disadvantages and, therefore, can be effectively merged into a unified trading system. Traders should also remember that no matter what analysis type they utilize, it is impossible to correctly estimate the future asset price 100% of the time.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
87% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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