Avoiding Rookie Mistakes – Choosing the Best Expiration Date for Your Option
A decent binary options trading approach is impossible without considering the expiry times. We talk about the period when the contract ends and the option gets closed. This is the time when you, as a trader, get the final result – a profit or a loss. Because of its huge importance, the time expiry should be well defined in every binary strategy. It would be unproductive to watch the minute chart when the expiry time is set at several days distance or to monitor a daily chart when the binary contract expires within minutes. Thus, one of the most important things is to adjust the time-frame to the expiry time and vice versa.
For instance, if you watch the 4H chart, you would be tempted to set expiry times at much larger distances: from several days to even several weeks. Moreover, if you know how trade on patterns (which is in fact quite lucrative), you may find hints relating to what expiration date is better to pick.
Choosing the Expiration Date
Despite the widespread opinion, trading binary options is much harder than many other trading forms, since you have to choose the expiry time with every binary contract. In Forex trading, there is no expiry time, which allows traders keep the trades as long as needed.
In binary trading, there are occasions when the price keeps in the money for almost the whole period and then, close to the expiry time, it suddenly falls and you record losses. It does not make any difference if your trade was ‘almost perfect’ once you lose your whole investment. To avoid such disappointments, you should learn to control the expiration dates.
Rookie Money Management
One of the basic ways to maneuver the expiry times is to consider the money management methods. For instance, let’s imagine you have made a trading program for the weekend that comprises four assets. Now, to apply a basic money management method, you would have to split your potential investment in four equal parts – like one for gold, one for Apple, one for EUR/USD, and one for GBP/USD (it can be any asset). Next, you should split each part in smaller quantities, depending on the number of trades. In the end, once the money is properly distributed, you can trade on both short and long expiry times, and the composite result may be a profit or a loss, but none of them in the extreme.
Using Timeframe to Choose Expiry Time for an Option
It is very important to stick to the plan, because this is the purpose of a plan – to be respected. Choosing the expiry time should be done in accordance with the time-frames that you operate with. For instance, let’s imagine that you apply a strategy based on the RSI oscillator that evaluates the overbought and oversold levels combined with the divergence. If the RSI parameters are evaluated on the hourly or daily chart, then it would be useless to set an expiry time sooner than the end of the day.
When you set the expiry time at the end of day, it doesn’t necessarily imply that you have to wait for a whole day for the contract to get closed, because if you place a trade closer to evening, then only a few hours would be left for your position. The same thing is true when you set the expiry time at the end of the week or at the end of the month. For example, when you trade on Friday by setting an ‘end-of-week’ expiry time, your position would have less time left than when you start trading on Monday and choosing the same expiry time. Thus, you should use technical analysis and money management methods to stay away from one of the crucial mistakes: overtrading or trading short expiration dates when long-term expiry times are not actually taking that much time as it seems.
Short-term Expiry Rates
By applying the methods described above, you can benefit from the fact that the volatility created by economic reports will have a much lower influence on the final result, as the expiry time will pass over it. There are traders who don’t support short expiry times and there are traders who don’t support longer expires either. As a trader, you will have to determine your own balance between these relatives. This is possible only with a strong discipline and proper market analysis.
When we say analysis, it doesn’t necessarily mean technical analysis. You can trade based on fundamental analysis too. I mean you can trade on the news. Anyway, if you trade on the news, you should not ignore the wider picture, because in cases like this, you wouldn’t succeed without setting medium or long term expiration dates, and a long-term expiration date without a wider picture is simply not acceptable.
We hope this post will help you understand the important connection between the different time-frames and the expiry time you should pick. The time-frame reveals your trading style, like long-term or short-term, but the expiry time will reveal if you end up profitable or not. Setting the expiry time has the same importance as choosing between the Call or Put options. Many traders don’t understand this huge importance, but we are sure that after this article, you will know how to deal with it and how to set the expiry time in your favor.
|Min. Invest||Min. Deposit||Max. Returns|
|All brokers >>|
References and Further Reading:
- Trading by Directors Around the Expiry of Lock-In Agreements in UK IPOs (Susanne Espenlaub, Marc Goergen, Arif Khurshed, Marko Remenar)
- Optimal Trading Strategies in a Limit Order Market with Imperfect Liquidity (Kovaleva, P. & Iori, G.)
- Service advertisements in wireless local networks (Stefan G. Hild, Dirk Husemann, Michael Nidd)
- Option Trading Manipulations on Expiry Date (Asaf Ben, Ilanit GAVIOUS, Rami YOSEF, Mosi ROSENBOIM)
- The Term Structure of Volatility Implied by Foreign Exchange Options (Xinzhong Xu and Stephen J. Taylor)