Boundary Binary Option Trading Strategy

Binary Options Trading

“Binary trading” has become something of a buzzword in the financial industry recently. It’s a fairly straightforward way of making money: you basically hedge bets on whether the price of an asset (such as a stock) or a commodity (e.g., the price of gold, oil, etc.) will rise, fall, or remain the same within a specific period of time.

Say, you were betting that the price of gold would increase within the day. If the price of gold increases at the end of the day, you profit from the trade. If it either decreases or remains the same, however, then you incur a loss.

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Boundary Binary Option Trading Strategy

The boundary binary option trading strategy, which is sometimes called “tunnel trading,” is an offshoot of binary trading’s basic principles. With this, you still make a bet as to the outcome of an asset or commodity’s value within a set time frame, but you make it more specific.

For instance, say you want to make a boundary trade on a certain company’s (or “Company X” for illustration purposes) stock price. If you speculate that Company X’s share price will be trading anywhere within USD7 – USD12 per share within a 30-day period, then you would be entering into a boundary options contract. If Company X’s share price closes within the USD7 – USD12 range as you predicted at the end of the 30-day period, then you profit off the deal. However, if it falls short of the lower end of your range or if it exceeds the ceiling price you’ve set for the trade, then you finish “out of the money” or at a loss.

boundary binary option trading strategy

The Specifics of the Boundary Binary Option Trading Strategy

To illustrate the concepts behind the boundary binary option trading strategy further, take a look at some of its underlying characteristics:

1.) First of all, it is specific. Unlike with your usual binary trades where you hedge your bets based on a high/low outcome, boundary options require more clearly-defined values. The term “boundary” is applied precisely because your speculative values serve as such.

2.) There are two primary ways in which you can apply a boundary binary option trading strategy:

  • a. Trading within the boundary options. This was demonstrated in the example described previously. Your speculation would be defined by the value of an asset or currency falling within a specific range. In cases like this, you determine the floor price and the ceiling price of the asset or currency price’s movement. Generally, the smaller the trading range is (e.g., when the difference between the floor price and ceiling price is less than a dollar or so), the shorter the period of time is for the trade.
  • b. Trading outside the boundary options. Inversely, you can also speculate that the price of an asset or currency will not fall within a predetermined price range, or rather, that the price falls outside of it.

This could go both ways. For instance, you could speculate that the share price of Company X will either fall below USD7 per share or that it will exceed USD12 per share by the end of the specified period. You finish the trade “in the money” (i.e., you profit), if Company X’s share price is either below USD7 or above USD12. On the other hand, if the share price is within the USD7-USD12 range, your trade will finish “out of the money” (i.e., you incur a loss).

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3.) As with your basic binary options trading, boundary option trading also requires that you set a time period. This could be anywhere between fifteen minutes to just over a year, depending on how far apart your boundary prices are. The key thing to bear in mind is that the price of the asset or currency you are trading with should either be inside or outside your predetermined boundary price by the end of your chosen time period.

4.) Boundary option trading is considered to be a more advanced alternative to basic binary option trading. If you are already experienced in binary option trading and would like to express a different view of various markets, boundary option trading could very well be the next step for you.

Tips to Get Started

If you are itching to try boundary option trading at this point, the following are some tips to help guide you along:

1.) Research, research, and research. The difference between a gambler and a boundary option trader is that the latter is taking on a calculated risk. Simply put, unless you study a specific area of the market well before placing a bet for your boundary option trade, you may as well just head to the nearest casino.

If you plan on trading boundary options in certain commodities, such as oil, then you need to study its fundamentals. Figure out how the market price is arrived at, which entities are influential in determining the value, and keep a close eye on the latter. It also helps to have a working knowledge of the said commodity or currency’s price movement and history so you have a better chance of predicting which direction it’ll move towards next.

2.) Figure out which area you would do better in, and do it quickly. Not all traders do equally well in the same area of the market. If your day job involves keeping an eye on the movement of foreign currencies, then you are perhaps more inclined towards the foreign exchange markets rather than the commodities markets.

Basically, play to your strengths and stick to the things that you know.

3.) Pick the right brokerage firm. You can narrow your choices down by determining which market you want to focus on trading in and whether you’re in it for the short or long haul. There are various brokerage sites for boundary trading on the Internet, so you need to know where you stand on either of those two things.

For example, if you are looking to trade long-term in the foreign currency market, you may want to steer clear of the 60-second foreign exchange options that cater to brokers who thrive on shorter-term, more volatile trades.

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