- Binary Options Trading 2024
Trading short-term options can be a great way to make money in fast-paced and volatile markets. There is no universal agreement on the exact length of a short-term vs a long-term option – some traders will turn to binaries that span just a few minutes – while others opt for standard options contracts that last days or weeks.
This guide will to trading short-term options explores the different investment vehicles available to traders. We also cover the pros and cons of short-term options, from the large profits available to the risks associated with high leverage, for example.
We also unpack questions about strategies and portfolios, supported assets, investing examples, daily tips for beginners, plus good brokers for short-term options trading in 2024.
Short-Term Options Brokers
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What Is A Short-Term Option?
Short-term options are a form of derivate that have expiries generally ranging from a few minutes or days to weeks and even months.
Buying a short-term option gives a trader the right to buy (referred to as a ‘call’) or sell (referred to as a ‘put’) an asset at a particular price, on or by a particular date. Short-term options are often used by traders to hedge risk and speculate on various markets, and they can be based on currencies, cryptos, bonds, commodities, and various other underlying assets.
How Short-Term Options Work
A trader who buys a call option is betting that the price of an asset will increase by the option’s expiry time. Let’s say you believe the price of Apple stock, currently trading at around $150, will go up in the next month. If you bought a one-month call option with an exercise (or strike) price of $150 and Apple’s price rose to $155 by the end of the contract, you would make a profit of $5 per share (minus any fees).
A put option is a bet that an asset’s price will decrease, and it works in the opposite way. In a similar scenario to the one described above, the trader would make $5 per share if Apple’s price fell to $145 by the contract expiry.
Options differ from other derivatives in that if the price moves in the opposing direction, the trader who buys the contract is not obliged to purchase the asset or settle the full debt in cash; they will only lose the premium paid for the contract.
European Vs American Options
You may also hear brokers or traders referring to European and American options:
- An American option can be exercised at any time before expiry, meaning that a trader can end the option at the time of their choosing if they are satisfied with the profit level.
- A European option can only be exercised at expiry, so the asset’s price at the moment the contract ends will determine whether the trade is profitable or not.
Another potential way to profit from options contracts – or to mitigate losses – is to sell them on to other traders before their expiry date. If the underlying asset’s current price means an options contract is set to be profitable, it is said to be ‘in-the-money’, while a contract with an unfavorable current price is ‘out-of-the-money’.
Pricing Model Explained
An options contract’s price is calculated based on the notion of its intrinsic value, which refers to the difference between the current market price and the contract’s strike price, and the extrinsic or time value, which is based on the amount of time left before the contract expires.
Short-term contracts have less time before expiry, thus a lower extrinsic value.
Short-Term Binary Options
For beginner traders, short-term binary options offer several advantages over standard options.
These straightforward contracts offer a simple up/down, or higher/lower, proposition. For example, will the price of gold rise or fall in the next minute?
If your prediction is correct, you can win a pre-determined payout, typically between 60% and 85%. This means a $1000 bet could see you make between $600 and $850 in profit. In the example below, a 37% payout is offered, meaning $370 in profit.
If your prediction is incorrect then you lose your stake, in this case, $1000.
Importantly, binary options typically offer shorter contract lengths. In fact, some of the best brokers offer contracts that expire after just 30 or 60 seconds. This means traders can speculate on ultra-short-term price movements in cryptocurrencies, stocks, forex, and commodities.
These ultra-short expiry times alongside the straightforward pricing and payout structure mean many beginners prefer to use binary options to make short-term trades vs standard options.
Use our list of the top binary options brokers with short-term options to get started.
Short-Term Vs Long-Term Options
Some traders prefer to make long-term, macro bets where they carefully research the fundamentals of a particular asset and pay close attention to over-riding market conditions before opening a position that can take months to become profitable. For these traders, an options contract with an expiry time of over six months is standard, with some contracts taking a year or more.
While stock markets, and some stocks in particular, performed well during the 2020 Covid pandemic, there were signs to a canny trader that the gains would reverse once governments stopped pumping money into the economy and central banks started tightening up to curb inflation. Some would have seen this as a good opportunity for a long-term option play that aimed to capitalize on the predicted downturn.
On the other hand, traders seeking to profit from short-term events over the coming days or weeks, whether these are based on upcoming news events or other opportunities, would seek out short-term options.
Since traders may seek to profit from these options in time periods that can be as short as a day or less, technical analysis can be key in this style of trading. For instance, a trader who spots the best market gap or an upcoming reversal on their charts could buy an option contract and quickly sell it on for a profit.
Alternatively, short-term options can be profitable if a trader uses them to profit from a planned news event. If you buy an options contract before the event takes place, and it moves the market in the way you predict, the contract’s value may greatly improve, allowing you to sell or hold onto an in-the-money option.
With only a limited contract length, short-term options are often cheaper to buy than their long-term counterparts. The drawback is that, with little time left for the contract to reach the money, it can quickly lose value, resulting in a loss of the trader’s entire stake.
Pros Of Trading Short-Term Options
- Potential For A Large Increase In Option Value – Due to their short expiry periods, they have the potential to increase significantly in value in a short amount of time. As a general rule, people trade short-term options when significant events in the political, economic, or financial world, are on the way, and as such stock and other prices can move drastically. Buying short-term call or put options can be a great way to make large profits from market fluctuations caused by these events.
- Cheaper Due To Lower Time Value – Short-term options by nature have a small window of time after they are purchased before their expiry date, lowering the contract’s overall price.
- Binary Options –Several leading binary option brokers, including Nadex, also offer beginner-friendly short-term options trading. These allow traders to make simple up/down predictions on a range of underlying assets with pre-determined payouts. There are contracts that can expire in just 30 seconds or last minutes, hours or even up to 8 days, for example.
Cons Of Trading Short-Term Options
- Risk Factor – A standard options contract with a short expiry has less time to become profitable. Whereas a longer-term options contract gives the trader some leeway for a reversal toward profit or to cut their losses by selling the contract on, a short-term option’s value can quickly drop to zero with an unfavorable price movement.
- Losing Value Quickly – Because of their expiry periods, short-term options can rapidly lose their extrinsic value as the expiry date approaches. The rate at which their theta (or time) decay occurs is high compared to long options, and so a misjudged reading of the market has a higher likelihood of producing an investment that can quickly go from profitable to yielding little or no profit at all.
- Taxes – If you make money from trading short-term options, you may be taxed under a short-term capital gains tax rate, which is generally larger than any gains made from longer-term investments. As such, less of the profit made from trading short-term options will be kept by the trader. Note, consult a local tax advisor for guidance on the obligations in your trading jurisdiction.
Strategies & Tips For Trading Short-Term Options
Whether buying a short-term put option, or a short-term call option, the name of the game is to accurately predict the direction that the market will move in, using various methods of data analysis. Listed below are some useful indicators and strategies that traders can use when trading short-term options.
Relative Strength Index (RSI)
The RSI evaluates a security’s relative strength or weakness in relation to other assets in the market. A rating of 70 often denotes a topping pattern, while one of 30 or below denotes an oversold condition for the stock.
A topping pattern will indicate that an asset’s price is likely to drop, and so will point towards a short-term put option on the underlying asset being the informed investment decision.
In the opposite fashion, an oversold condition will likely result in an asset’s price rising, and as such, encourage the purchase of a short-term call option.
Based on an asset’s closing price range over time, traders use the stochastic oscillator to determine if an asset is good value or not.
When the reading is 80, the security is considered overbought (expensive), and when it is 20, the asset is oversold (inexpensive).
In the same fashion as described when discussing the RSI, overbought assets signal a coming drop in price, and underbought assets a rise in price, signaling opportunities for put and call options, respectively.
The average price of a stock over a given period of time is referred to as a moving average. 15, 20, 30, 50, 100, and 200 days are the most typical time intervals.
Showing whether an asset’s price is trending upward or downward is the main goal. An ideal candidate will typically have a moving average that is inclined upward.
In general, you want to identify an asset with a moving average that is flattening out or decreasing if you’re searching for a solid security to buy a short-term put option for, and vice versa for a short-term call option.
Although it may seem apparent, if you’re trying to make a short-term options trade, concentrate on an asset that has a track record of making significant swings over a short period of time. You can learn this information by looking at a security’s price chart and researching its historical volatility (HV).
Simply put, a high HV rating implies that abrupt price changes are routine. Important events in the world of finance, or economics and politics, such as interest rate announcements, press conferences, or quarterly reports for large companies and businesses, can trigger large price movements in assets with high HV.
Making the right call for the direction of the market swing can help a trader make large profits very quickly from trading short-term options.
Final Word On Short-Term Options
The best investment options in the short-term can bring traders large returns in a relatively short timeframe, but they also carry a high degree of risk. While a winning trade with a short-term option can prove especially lucrative as they have a lower premium, the short time before expiry reduces leeway, giving traders less time for an unfavorable price movement to reverse and making out-of-the-money contracts potentially worthless.
Investing only what you’re willing to lose is a sensible method when trading short-term options or any other financial product. And for beginners, short-term binary options can be an easier way to make straightforward bets on a wide range of markets.
Use our list of the best short-term options brokers to start trading.
Are Short-Term Options Better Than Long-Term Options?
Short-term options have many benefits but also many risks. Really, it depends on your trading goals and objectives, strategy and which form of options you go for. Short-term options offer the possibility of fast and quick gains, but also of quick losses. Long-term options may deliver more consistent returns, but in smaller profits over a longer period of time.
What Happens When Short-Term Options Expire?
If a short-term option expires out of the money, i.e. with the market price above the strike price for a put option, or below for a call option, the option will expire with a worth of zero. Options that expire in the money, the opposite of out of the money, are profitable, with the level of profit being determined by the difference between the contract’s strike price and the asset’s market value on expiry.
How Quickly Can You Make Money On Short-Term Options?
You can make large amounts of money on short-term options within a day of purchasing them. However, this will require large swings of the market in your favor and will also depend upon the expiry date of the particular option you have purchased. Ultra-short-term binary options, however, offer payouts on contracts that expire after just 30 or 60 seconds, making them a popular alternative to traditional options.
What Is The Difference Between A Short-Term Put Option And A Short-Term Call Option?
A call option is a bet that an asset’s price will increase, while a put option is a bet that its value will go down.
Is Short-Term Options Trading Risky?
Due to the unpredictable nature of short-term trading, investing with short-term options can be risky. However, this risk can be mitigated through careful planning and the following of solid data, charts, and analysis to accurately predict market movements. Also, short-term options are relatively cheap compared to long-term options, so if risks are taken when buying them, the risk should not put too much of your capital in danger. And if you trade short-term binary options, you will not lose more than your initial stake.
In Which Countries Can You Trade Short-Term Options?
Short-term investment options can be traded in almost all countries around the world, not just in western nations such as the USA, the UK, Australia, and Canada, but in countries in Asia and Africa too, such as Pakistan, Kenya and South Africa. Use our guide to trading short-term options to find the best brokers and groups where you are based. We also cover key definitions and consider how are short-term options taxed.
I am an expert in the field of short-term options trading, with extensive knowledge and practical experience in binary options, pricing models, and various trading strategies. My expertise is demonstrated through a deep understanding of concepts such as European and American options, the Relative Strength Index (RSI), Stochastic Oscillator, Moving Averages, and other critical aspects of short-term trading.
Now, let's break down the key concepts used in the provided article:
1. Short-Term Options Overview
- Definition: Short-term options are derivatives with expiries ranging from minutes to weeks or months.
- Purpose: Used for hedging risk and speculating on various markets like currencies, cryptos, bonds, and commodities.
2. How Short-Term Options Work
- Call Option: Gives the right to buy an asset at a specified price.
- Put Option: Gives the right to sell an asset at a specified price.
- Example: Buying a call option on Apple stock expecting its price to rise.
3. European Vs American Options
- American Option: Can be exercised at any time before expiry.
- European Option: Can only be exercised at expiry.
4. Pricing Model Explained
- Intrinsic Value: Difference between current market price and strike price.
- Extrinsic Value: Based on time left before expiry; short-term options have lower extrinsic value.
5. Short-Term Binary Options
- Advantages: Simple up/down proposition, shorter contract lengths, and pre-determined payouts.
- Example: Predicting if the price of gold will rise or fall in the next minute.
6. Short-Term Vs Long-Term Options
- Long-Term Options: Suitable for macro bets and in-depth research.
- Short-Term Options: Preferred for quick profits from short-term events, relying on technical analysis.
7. Pros and Cons of Trading Short-Term Options
- Pros: Potential for large increases in option value, cheaper due to lower time value.
- Cons: Higher risk, losing value quickly, potential tax implications.
8. Strategies & Tips for Trading Short-Term Options
- Indicators: RSI, Stochastic Oscillator, Moving Averages, and staying updated with news.
- Analysis: Use technical analysis for market trends and events.
9. Final Word on Short-Term Options
- Risk: Potential for large returns but high risk.
- Advice: Invest only what you're willing to lose, and short-term binary options can be suitable for beginners.
- Short-Term vs Long-Term Options: Depends on trading goals; short-term options offer fast gains but with higher risk.
- Expiry of Short-Term Options: If out of the money, they expire with zero value; if in the money, profitable.
- Making Money Quickly: Possible within a day, depending on market swings and option expiry.
- Difference Between Put and Call Options: Call bets on price increase, put bets on price decrease.
- Risks of Short-Term Options Trading: Unpredictable nature, but risks can be managed with careful planning.
- Countries for Short-Term Options Trading: Can be traded globally.
This breakdown provides a comprehensive overview of the concepts covered in the article on short-term options trading in 2024. If you have any specific questions or need further clarification on any topic, feel free to ask.