The downside to the naked directional play is that there is no cover whatsoever. If anything goes wrong during the trade, the investor stands to lose a large percentage of the investment, if not the entire investment. If a naked directional play is taken on an option that expires relatively soon, many professional investors think that it is no different from gambling. However, the naked directional play is a valid trading option if you are truly sure about the timing and the direction of the underlying investment. Although it should be used with caution and in conjunction with other techniques, it is not a technique to be completely shunned by any means.
Playing Both Sides of a Trade
One of the best ways to set a limit on a market loss is to play both sides of a trade. In a binary options market, trades that are opposite of each other move very closely against each other. This is not always the case in the regular securities market; however, the binary market is a bit different based upon the simpler choices.
In order to play both sides of a trade, an investor must still pick a preferred side. However, the investor will also buy options on the other side of the trade in order to limit the loss that can be taken on the trade. By limiting the loss in a portfolio of trades, a TorOption investor can easily manage the risk mathematically over the full spectrum of trades.
One of the most effective yet simple strategies that many new investors take is based on trend lines from charts. If a trend shows that an option will go up, then an investor should choose the call option. If the investor believes that it will go down, then an investor would do well to choose the put option. The true art of the trend strategy is figuring out whether a trend is truly going up or down and if it is preparing to switch directions.
In order to predict the movements of a trend, an investor should learn about switch points and resistance levels. Securities do not move in one direction forever, and just because a stock or an option is moving in one direction does not mean that it will stay moving in that direction until the maturity of your option. Timing is very important in these types of strategies. This is why an investor must choose this strategy wisely. It is usually most prevalent when there will be no upcoming news about the security and a trend has already been set.
Straddling an Option
A strategy for a security that an investor expects to move in a volatile fashion is a straddling option. You could consider this the same kind of strategy as playing both sides; however, the calls and puts that an investor purchases are made at different times. In some cases, an investor will try to catch a "swing" in the price of a security, seeing that it is going down but will reverse the trend based on a news item in the future. The opposite can also happen – a security can be going up, but an investor will purchase a put on it because the investor expects the security to reverse itself based on a news item in the near future.
Straddling an option requires advanced techniques, but it is considered one of the most viable strategies for the binary options market.
All of the above strategies can be used in the binary options market. However, they are by no means a full list of the strategies that a seasoned investor will use. Be sure to keep your ear to the street and focus on the research from reputable sources like TorOption.
Updated on 10. February 2020
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