Binary Options Ladder Trading
It is no secret that the key to binary options trading is being able to successfully predict price movement; it’s the key to any type of trading for that matter. Often times a trader has to choose one of several positions where he thinks the price movement will either change or keep trending in the same direction. Sometimes the trader will be right on several predictions, but they were not right on the one that they chose to make their trade with. That is where ladder trading would have been a good idea.
Ladder trading is just starting to gain popularity as more and more web trading sites make it available to their traders. Those who use claim they can be very successful with it at times. Before you can use it though, you must know what it is and how it works.
Once you know what ladder trading is, the theory behind it and how to do it, it is pretty simple. It’s kind of like placing a win, place and show bet at the horse track; if all three horses come in that is great, but if not, the other bets have a chance at getting your money back.
Binary options ladder trading is a type of trading where you will receive several price levels at equal distances from each other; that is how the pattern is formed in the shape of a ladder. More simply stated, a binary options ladder trade is one where you try and predict the level of an asset price to change over a certain time frame until the option is active. The trader must predict and set these levels and the time periods they pertain too. To make a successful trade, the price needs to exceed the level of each “rung” of the ladder.
We all remember a time when we liked the price movement of an asset, but we also had a feeling from the analysis that the asset could get some significant support or resistance in the near term. That is why you would place a ladder trade; you can still make a profit even if you are only 2/3 right on your prediction. Ladder trades help you minimize risk.
Let’s take a look at an example ladder trade:
After you examine an asset that you think is predictable, you are ready to make your ladder trade. You place the trade by picking a progressive series of strike prices and expiration times in the direction you feel the market will trend. The payoffs are based on percentages that your broker determines.
Take a look at an example ladder trade to help you see how it works more clearly:
Pick an asset you want to place a trade on, for instance USD/JPY. At the present time the price is 116.30. It’s now 11 am.
You set where you think the strike price will be and the expiration at three different times.
SP #1: 116.50 at 11:09 am. Payout: 30%.
SP #2: 116.95 at 11:29 am. Payout: 45%.
SP #3: 117.10 at 11:49 am. Payout: 65%.
The broker you are trading through will set the payouts. The figures they come up with will be based on the risk factor involved in the trade. For example, if you set short strike prices with short time frames then you will likely have much smaller payouts than if you did the opposite. So when doing a ladder trade you have to make sure the risk is worth the reward or stay away from it.
If you call it right, then ladder trading certainly can be very profitable.
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References and Further Reading:
1. The short put ladder strategy and its application in trading and hedging (V Soltés, OFS Amaitiek – Theory Methodology Practice (TMP), 2010)
2. The Short Call Ladder strategy and its application in Trading and hedging (OFS Amaitiek, T Bálint, M Rešovský – Acta Montanistica Slovaca, 2010)
3. Exotic options trading (F De Weert – 2011)
4. Stackelberg financial-leader in insider trading model (LFS Wang, YC Wang, S Ren – International Review of Economics & …, 2009)
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