This chapter deals with the kind of option contracts which offer hefty returns when a trader is able to forecast the trend perfectly. However, it should be remembered that the basic manner in which these options are traded is similar to the other kind of binary option contracts offered by a broker.
- Ladder options:
The basic structure of a ladder contract is similar to a one touch option contract. However, a ladder contract, as the name suggests, will have multiple target levels. If the price of the underlying asset crosses or at least touches all the levels once, then a trader will receive a payout ranging from 500% to 1500% (depending on the target levels).
Binary brokers offer call and put ladder contracts based on whether the target levels are above or below the prevailing price of the underlying asset in the market. If a trader predicts a strong uptrend in the price of an asset, then a call ladder contract should be purchased. Alternatively, when a trader predicts a steep decline in the price of an asset, then a put ladder contract should be bought. It should be noted that brokers hardly use the word ‘call’ or ‘put’ in the ladder contracts and the binary traders are expected to understand the difference by comparing the target levels with the prevailing price of the underlying asset in the market.
It should be noted that the price need not stay above the target levels for receiving the pre-determined payout. As long as the price breaches the target levels on the ladder within the expiry time, the trader will be credited with the predetermined payout. Interest rate hikes, unemployment numbers, nonfarm payroll, and GDP data are some of the important announcements, which can be used to trade a ladder option contract.
- Pair trading:
As the name indicates, < href="http://www.investopedia.com/university/guide-pairs-trading/">pair trading involves two assets, usually from the same sector. The trader should place his bet on the asset which he believes would outperform the other. If the forecast turns out to be true, then the trader would receive as much as 350% on the investment. Pair trading is offered by binary brokers in two different formats, namely fixed and floating pair trading.
- Fixed pair trading:
The prevailing price of the underlying asset is recorded when the trader enters into a fixed pair trading contract. The price of the assets before the contract is purchased is of no importance. For example, let us consider that a binary trader forecasts a rise in the price of asset ‘X’. At the same time, the trader is also anticipating a fall in the price of the asset ‘Y’. To capitalize on the mutually opposite price movement, the trader enters into a call option in the pair X-Y. Let $50 and $100 be the price of the asset ’X’ and ‘Y’ in the spot market. Let assume that the contract expires in one hour. At the end of one hour, let the price of ‘X’ is $55 and the price of ‘Y’ is $107. This means that the asset ‘X’ has appreciated by 10%, while the asset ‘Y’ has appreciated by only 7%. Considering the fact that the asset ‘X’ has appreciated more than asset ‘Y’, the trader is considered to have won the trade and up to 350% of the investment amount is paid as returns.
- Floating pair trading:
In the case of floating pair trading, the underlying price of both the assets in the spot market is recorded when the contract becomes available for trading. The price of the underlying assets at the time when a trader enters into a contract is irrelevant.
In the example discussed above, let us assume that the price of the underlying asset ‘X’ was $52 at the time the contract was made available for trading by the binary broker. Furthermore, let us assume the price of the underlying asset ‘Y’ to be $95. Let the contract expiry period be 2 hours. If the trader enters into a call option in the pair X-Y after a particular time period, say one hour for example, still, at the time of expiry the outcome of the trade will be based on $52 (price of ‘X’) and $95 (price of ‘Y’). In this case, based on the expiry price of $55 and $107, the asset ‘Y’ has appreciated more. Thus, the trader would lose his investment.
- Fixed pair trading: