By Darrell Martin
Long-time traders tend to stay away from trading in a bearish market. If the market is moving down it is considered bearish. It is hard to know where the bottom is going to be. As the downtrend continues, pessimism and anticipation of losses continues to grow. Traders watch as account sizes shrink and negativity rises. Binary option traders often find the opposite is true.
Why Sell If The Underlying Market Is Bearish?
With binary options, the risk is capped and always known up front. There is no margin call, so you can never lose more than the amount you risked going into the trade. There are three types of trades that can be used when selling in a bearish market: an ITM contract priced above the current indicative price, an ATM contract where the indicative price is very close to the strike price, and an OTM contract where the price is below the indicative price. Each one of these conditions has its own set of characteristics or strategies and can be profitable when taking advantage of a bearish market.
Binary Options Are Based On Underlying Markets
When the underlying market moves down, that movement is reflected in the price of the binary options increasing the values of the sell side of each strike. This may seem counterintuitive, but when you sell a binary option, you want the price of the contracts to go down instead of up. Selling is also known as shorting. However, price is not the only reason for the trade.
Other Things To Consider
Binary option traders need to consider how much time is left until expiration and if the market will continue moving down within that time period. For example, are you trading five-minute, 20-minute, Intraday, etc.? If you expect the underlying to move to a certain point in three hours, but there are only two hours left until expiration, you should not make the trade. All of these expirations will impact your trading decisions. Be sure to pay attention to the expiration you choose.
What Strategies Can I Use When Selling Binary Options In A Bearish Market?
When it is a down trending market, you can sell an in the money (ITM) contract and then buy it back at a lower price, thus collecting premium. An example is selling a contract at 25 then, when the underlying market causes the price to drop to 5, buy it back for a $20 profit. ITM contracts can be profitable if the underlying moves slightly up, (staying under your strike price), stays where it is at or goes down.
Similarly, you can sell an at the money (ATM) contract at around 50 buying it back at 30 or lower, if you think the market is going to continue dropping, eventually settling below the strike price. ATM strategies require that the market stays below your strike price because you can be less than or equal to your strike price and still be profitable.
Another choice is to sell an out of the money (OTM) contract buying it back at a lower price. A contract offered at 90 is considered ITM for the buyer. It is considered OTM for the seller. You could sell contracts entering at 90, and then buy back at 55 for a $45 profit on each contract. Alternatively, you might hold until expiration and collect the full payout of $100, minus your $10 risk for a $90 profit. These are generally considered low risk, low probability trades. The market has to move in your direction for you to be profitable.
How Bearish Are You?
How bearish you are is dependent on the amount you are willing to risk, your personal opinion of the market and the time frame of your trade. If you are very bearish, OTM trades have a low risk and can be very profitable. ATM trades have a higher risk and an even probability. If you are slightly bearish and think the market is not going to rise above your strike price, ITM trades have a higher risk and a higher probability of being profitable.