Relationship between Strike Price and Payout:
Binary options higher probability of paying off will have a lower payout percentage. If we take the example of a binary call option with a strike price equal to zero, the option will certainly pay out because it will always expire in-the-money. Forgetting about broker spreads for a moment, this option should pay out exactly the initial investment because the outcome is certain, there is no risk. As we increase the strike price and therefore decrease the probability of paying out, the payout should increase. In theory, a binary call option with a strike price equal to infinity has 0% chance of paying out. Even if this option had an infinite payout percentage, nobody would ever buy it!
In the real world, we are typically looking at options where there is reasonable probability of paying out, but there is some uncertainty. Uncertainty means risk and risk means profit potential. The key is to find options where we can gain an advantage over the brokers. To take advantage of the binary options brokers, we need to first understand how they think. The way banks and options brokers typically calculate the payout percentage is with the assumption that the levels of the underlying asset at expiration are normally distributed. They don’t consider factors that tend to move the underlying assets one way or the other. To make money, use our trading strategy to figure out which way the market is going. We know our probabilities will be better than the broker’s theoretical probabilities.[bbinary] standard binary options are struck at the current level. This is constantly updating as the market moves. In any market there is a bid and an offer, and as the asset trades on the bid or the offer the “current level” jumps from one to the other. One easy thing you can do is time the trade execution so that you get a strike price on the right side of the market. If you are betting the asset will go up, you want a low strike price, and if you are betting it will go down you want a high strike price. Just wait until the strike price jumps in the right direction to click apply.
Momentum Strategy for Strike Price Selection:
Momentum strategies follow the basic physics law: objects in motion tend to stay in motion. If your asset is moving down, it will tend to continue down unless some other force stops it. Support and resistance can stop assets from moving with momentum. If your asset is moving down and there is a support level nearby, the support level might cause the asset to reverse direction and trend higher. To make a profitable momentum trade, you want to make sure that you pick strikes that are not at or near support and resistance levels. To find support and resistance levels, just look at the charts. Look for levels or regions where the asset appears to “bounce” off to trade in the opposite direction. If possible, select levels where this has occurred more than once in the same level or region. There is a lot of uncertainty around these levels, which means they are not good strike prices to choose. Instead, I would wait for one that is more in the “meat” of the momentum trend and far away from support and resistance levels.
Selecting appropriate strike prices is key for your trading strategy. You want to choose strikes that give you an advantage over the brokers, and avoid strike prices that have unnecessary uncertainty. If you can get that part right, you are well on your way to a profitable trading strategy.