Binary Options Trading

How to build your Binary Option portfolio

Binary options are a special type of option in which the trader purchases a contract based simply on whether an asset price will increase or decrease over the life of the contract. Unlike many options, gains and losses are both fixed, as are contract lengths. Contract lengths are generally very short in the world of binary options, with the longest standard binary options generally lasting only one hour, and some short contracts expiring in only five minutes. Because of this short duration, building a portfolio of binary options is not possible in the traditional sense – contracts expire so quickly that no portfolio is held.

Many people build a virtual portfolio of assets they tend to trade in, however, and this can be a strong way to make binary options more profitable. Because binary options can be purchased on virtually any underlying asset, many people are tempted to trade on everything, and as such end up spread a bit thin, with little understanding of most of the assets they’re involved in. Coming up with three or four core assets which comprise a binary option portfolio can be a good remedy for this, and can help ensure that more subtle changes in the market are detected and leveraged for gain.

This doesn’t mean that a binary option portfolio shouldn’t be diverse, however. Often when one sector of the market is stagnant, another is moving, and the ability to purchase a contract no matter what’s going on is a great asset. As a result, building a portfolio which includes assets from different asset classes is a good idea.

For example, a binary option portfolio might include eight different assets that the investor trades in exclusively. A sample portfolio might include: EUR-USD, USD-JPY, EUR-CHF, Gold, Oil, Corn, Apple stock, and BP stock. This gives the investor a good diversity across three classes – Forex, commodities, and stocks.

Having three benchmark currency pairs helps ensure that there is always something happening with one of them that leaves an opening for a binary option contract. EUR-USD often moves, based either on the shifting strength of the Euro or the USD. In some cases the Euro may be stagnant, however, and including the USD-JPY pair makes it much more likely that a currency contract can still be found. In other cases the USD might be sitting without shifting, in which case it is possible the Euro and the Swiss Franc (CHF) will see some change.

Similarly, while Gold and Oil are often connected in their movement – since the same fundamentals often drive them, such as a strengthening USD – they are also separate enough commodities that one may see changing value even if another is static – unlike, for example, Gold and Silver, which are nearly always tied. Corn rounds out the commodity spectrum, by introducing a crop commodity, susceptible to weather events. Finally, including two stocks in the binary option portfolio allows for a more traditional market approach. Choosing two stocks from very different sectors – in this case a tech stock and an energy stock – is a good idea, to help keep a diverse portfolio.