Gold Binary Options Trading

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

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A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

Gold Trading Strategy

Binary Options Strategy for Trading Gold Prices

This article is sponsored by OptionBit which is our recommended broker for trading gold with binary options.

Gold is one of the underlying assets traded in the binary options market. This is just as well too, because trading gold in the commodities market is just too risky for most retail traders. The margin requirements are high, it needs a lot of capital (in excess of $10,000) and a heart of steel to bear the drawdowns that could occur. That is not to mention the monumental losses that could occur in a crazy market when slippage could blow out a trader’s account.

Why Trade Gold through Binary Options?

The binary options market provides a way out to trade gold in a controlled environment, with reduced risk of a catastrophic loss, smaller margin requirements and by consequence, lesser trading capital needed. There is no fear of gold rolling back by almost a thousand pips against your position before it decides to do as you wish it to. No fears about over-exposing your account.

In the world of binaries, the trader’s loss is restricted to the cost of the trade. If the trade behaves as the trader wishes, he gets his cost back and some extra. This “extra” could be up to 81%, or if you know how to play this multiple ways, could be as much as 500%.

In trading gold, there are several things to consider before your desire to make money from it transcends from the pedestal of dreams to the reality of tangible dollars in your hands.

Firstly, there is the trade types:

– Touch/No Touch: Here, the trader bets on the price action touching a chosen price level called the strike price, (touch) or not touching that price at all (no touch). There are variations such as double one touch, double touch, etc. The key is that the chosen behaviour of gold has to occur in the trader’s favour before the expiry date.

– In/Out: The price of gold can decide to trade within a price range formed by an upper and lower trend line. Whether this asset decides to stay within the tunnel so created (in), or break out on either side (out), is a matter for the trader to decide. A correct choice is rewarded.

– High/Low: How about trying to decide if gold will end higher than the present price by the time the trade expires, or lower? Another way for the trader to possibly make money.

These are three possible outcomes that can translate into some cash to finance that shopping spree that has occupied your mind lately. Let us now help you along the way.

A Binary Options Gold Trading Strategy

Gold is volatile. Its daily pip movements are anywhere between 1,000 pips and 10,000 pips. With this sort of volatility, I would like to trade a Touch/No Touch trade. The key is to get the direction right, then set an appropriate strike price and expiry date. If we get these three ingredients right, the trade will succeed.

First, we have to ask ourselves: what makes gold tick literally? Traders love gold because it is a safe-haven instrument which they can buy in periods of uncertainty. As at late 2020/early 2020, was there uncertainty in the markets? The answer is a resounding YES! Eurozone uncertainty was really bothering traders. When there is uncertainty, the price of gold only heads in one direction; upwards!

So now that we had a direction, the next thing was to determine an appropriate strike price. An appropriate strike price has to be one which is achievable (within the price range of movements for gold), and which is not beyond a resistance point. An expiry of one week was set as the expiry period.

If gold is expected to be bullish, it should either Touch a bullish target, or Not Touch a bearish target.

Based on these principles, we had two gold trades on 19 th October, 2020 and on 12th January, 2020.

Trade 1

In the first scenario, we used a bullish gold prediction to predict a Touch on a strike price which was within reach, and it performed as we said it would.

Trade 2

This screenshot shows a No Touch trade for gold, where we used the principles we described above to say that gold was not going to touch a bearish target. A very profitable trade it turned out to be.

This is a summary of one of the ways to trade gold in the binary options market. There are other ways too, but if you master this method, you will make some good money.

Gold Binary Options Trading

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