By Darrell Martin
Selling in a bearish market was discussed in an article published earlier this week. An easy way to remember the difference between bearish and bullish is to remember that when a bear attacks, it swipes down. When a bull attacks, its horns are pointing up towards the sky. Bearish is going down. Bullish is moving up. If the market is bullish, it is trending upwards. If you are bullish, you believe the market will be moving up.
Why Buy If The Underlying Market Is Bullish?
It may seem like an obvious action to take since the market is appearing to go up, so you would want to buy in order to take advantage of that impending move. Buying is also known as going long. Three types of trades can be used when buying binary options in a bullish market:
- Long In The Money (ITM) Binary Buying a binary option with a strike BELOW the current market price
- Long At The Money (ATM) Binary Buying a binary option with a strike AT the current market price
- Long Out Of The Money (OTM) Binary Buying a binary option with a strike ABOVE the current market price
In this article, the different characteristics of each of these conditions and profitable ways of trading in a bullish market will be discussed.
Binary Options Are Based On Underlying Markets
It is important to remember that as the underlying market moves up, that movement is reflected in the price of the binary option. When trading binary options, having the risk capped and known before you enter the trade takes away some of the stress of trading. How much are you willing to risk and the price of the binary option, along with the expected move and the expiration time are all very important factors to consider when making your trading decisions. Make sure that there is enough time left for the market to make the move you expect, before you press the button to enter the trade.
Strategies To Use When Buying Binary Options In A Bullish Market
A Long ITM binary trade is used in either a directional or a neutral market. You are buying below the current market price, therefore, the market can go slightly down, stay flat or move up and you will still remain profitable. It has a higher risk because the price is higher and a lower reward compared to an OTM or an ATM trade. A Long ITM binary trade does however, have a higher probability of being profitable as the market is already above the binary strike price. It is a good idea to enter the trade closer to expiration so the market does not have time to turn down and move against your trade.
A Long ATM trade is only used when the market is trending up. It has medium risk, reward and probability because you are buying right where the market is currently priced. The market needs to move some in your favor by expiration for you to be profitable or you can experience a total loss of capital risked. Remember, bought binary options must be above and not just equal to the strike price at expiration. Risk/reward is approximately 1:1 if held to expiration. The binary price moves faster and can be used for scalping.
A Long OTM trade can be made when the market breaks out of a previous trend or when it is directional. This trade has lower risk and probability but higher reward. The lower risk comes from less capital being used. The higher reward happens only if the market moves in your direction far enough and fast enough to overcome the bid/ask spread and before the contract expires.
How Bullish Are You?
Across the market more traders are likely to be bullish. Your amount of bullishness ultimately comes down to your opinion of the market, the amount you are willing to risk and the time frame of your trade.