Binary Fence Strategy

Binary Fence Strategy

There can be no denying the fact that though binary options are a profitable means of trading, the risk of uncertainty or unpredictability of the asset movement cannot be totally eliminated. However, various strategies are available to minimize this risk, as much as possible. One such strategy is the binary fence strategy.

Introduction

In this form of trading, the trader trades within a decided range of prices for the underlying asset. Normally, this is adopted when the asset is moving in both directions and a clear cut trend of asset movement is difficult to be established. The trader buys two option contracts on the underlying asset which cover both asset movements. He trades within this fence and thus, he doubles his gains when the contract ends in-the-money and if it doesn’t, at least, he can restrict his losses.

How Does Binary Fence Strategy Work?

The underlying principle of this strategy is that the price can move in one direction in the short term and in the opposite direction over a greater period. This unpredictability in asset movement can be utilized to your benefit.

If the asset moves in an upward direction initially, then you place a call option. Later on, you feel that the asset price may be lesser than your earlier prediction and hence, you also go for a put option. A range of price or a fence is established and if the price settles between them then you gain in-the-money twice. The only problem arises if the price on expiry goes beyond this range and you lose money on both options.

In this strategy, you change your perception of the bullish market to a bearish and it could be the other way too. Whichever way you decide, the most important thing here is to time the second trade correctly i.e. it should be the point where the asset has attained its highest or lowest level and is on the verge of changing direction. If you fail to do so then your trade may end out-of-money.

Strategy Explained Thru Example

If the asset price is $1400 and the trader feels that the price will increase in the next hour due to some forthcoming news. So he places a call option for $1000 with expiry times as two hours. However, he realizes that the impact of the news is not going to be much and soon the price begins to move in a downward direction. The trader acts promptly in such situations and places a put option for $1000 when the asset price is $1450, with expiry time, as one hour after the earlier trade.

If the price falls between the fence and the payout is 75% then he will get $3500, giving him a profit of $1500. If the asset price settles at $1475 then he wins the call option but loses the put option and gets only $1750. If the asset price settles on $ 1375 then he loses the call option but wins the put option getting the same payout.

Cautionary Notes

The main pitfall in this type of strategy is that the impact of economic reports released by the government or any other institutions on US markets or global markets has to analyzed spot on. The trader has to possess an instinct for ascertaining the global impacts and take advantage of changed market sentiment; only then can he achieve good profits with fencing strategy.

Summarizing

This type of strategy works best in selected news trade. However, this is not useful for the novice traders. The experienced traders can prompt on analysis and take the requisite action. It is better for the novices to handle binary option types which are simpler.

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