Risk Reversal Binary Options Trading Strategy
The risk reversal strategy requires you to make a call and put trade simultaneously on the same asset normally this strategy is deployed when the market is extremely volatile leaving you unsure as to which way the market will go.
Let’s say an asset that you’re interested in trading seems to be on the rise but you get conflicting signals which indicate that it may also go the other way at any time soon – normally you will be advised to avoid making a trade in such a scenario but with the risk reversal strategy you can still place a trade and with a minimum trading risk since you’re taking up two positions.
In this video we’re going to show you how to use the risk reversal strategy in three simple steps.
Step 1
Pick out the asset that you’re going to trade, in our example we will use Twitter as the selected asset and decide which direction you think the price will go as the primary direction, if you think the price is going to end up higher, then the call market position will be the primary transaction but if you think otherwise then the put position is going to be the primary trade,
The reason why we need to differentiate between the primary and secondary trades is because of the payout ratio.
Step 2
When executing the risk reversal strategy always make sure that the payout for the primary trade is higher than the secondary trade – the payouts cannot be equal or this will result in you incurring a loss. Whichever way the price moves remember the objective of this strategy is to minimize your potential loss if the trade does not move the way you predicted.
In our example here we set the payout for the primary trade at a payout of seventy-five percent this means for every 100 euros we invest we will receive a 75-percent return on our investment if our trade closes in the money and if our primary trade closes out of the money we will still receive a small rebate of five percent.
For our secondary trade select the minimum payout of fifty-five percent with the highest rebate at twenty-five percent from the drop-down menu by doing so even if our secondary trade closed out of the money we will still get a rebate of 25% back with these payout ratios selected invest one hundred and fifty euros for the primary trade and 100 euros for the secondary trade. (Trade amounts are for example purposes only)
Step 3
Once we have decided on the payout ratio for both the primary and secondary trades simply execute the trade and wait for the trades to expire. Upon expiry you will have two possible outcomes if the primary trade closed in the money then you will receive a total of 262.50 from the primary trade and a 25 rebate from your secondary trade making it a total of two 287.50 and hence earning your net profit of 37.50.
If the primary trade closed out of the money then you will receive a total sum of 155 from your secondary trade plus 7.50 rebate from your primary trade – this means you would have made a net loss of only 87.50 from a total investment of two hundred and fifty euros in other words you have managed to reduce your potential loss by a considerable amount.
While managing to cover both sides of the trade will provide an indication of how strong the price movements. Regardless of how strong the trend can be it cannot carry on forever as such you must be prepared to eventually exit your position. With binary options your exit strategy is pretty much predetermined due to the fixed expiry time of binary options nevertheless you can still lock in your profits by using the trade profit feature on the anyoption trading platform this allows you to close your trade early before its actual expiry time hence enabling you to lock in your profits.
Trending markets are some of the most lucrative situations which you can hope for at any given moment
Disclosure: None.