Binary Ladder Options – Strategy and Trading Price

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Ladder Options – Trading Binary Options Ladders

Ladder options trading is somewhat similar to boundary (or range) options. While in boundary options two limits are provided – one upper limit and one lower limit, with ladder options, there are generally five price limits (the exact number will vary depending on the broker and the asset).

These limits are not always distributed symmetrically to the current price level. It means that all five limits can be below the current price level or 3 limits can be higher than the current price level and 2 can be lower, for example. The limits are generally traded in both up and down directions – but not always.

All the price limits have two options to trade with – ‘Above’ or ‘Below’ (maybe represented as ‘Call’ or ‘Put’ by some binary options brokers). Each limit will have a different payout percentage for the ‘Above’ and ‘Below’ options. The percentage depends on the likelihood of the prediction finishing ‘in the money’ (being correct). If the possibility of the prediction being true is high, the percentage payout will be small and vice versa. This is how ladder options can generate payouts reaching 1000% and above, the high payout reflect the low probability of them finishing in the money.
The limits – or ‘rungs’ – are defined by the brokers and cannot be changed. The expiry time can however, be altered. As the expiry time is amended, there is a corresponding change in the limits and their payout potential.

Ladder option – Example

Look at the screenshot below. On the right are a range of values – each has it’s own ‘Above’ and ‘Below’ payouts figure.

The payout amounts are relative to the $25 entered in the amount field. Each ‘rung’ on the ladder is a different value, and each requires a certain price movement from the actual asset price. The greater the price move required, the larger the payout. In the image, AUD/USD is trading at 0.7403. If you expect a big price spike, you can select “above” on the 0.74112 level and get a whopping 374% return if you are right.

The the mid-level option, has payouts of 47% for ‘below’ and 79% for ‘above’. The options at the very top and very bottom have only one option available – above at the highest point, and below at the lowest. The broker deems the other outcomes so likely, they are not willing to trade them at all.

Why Trade Ladder Options?

One of the attractions of binary options, is the simplicity. Some traders might argue that ladder options introduce a layer of complexity that moves away from that ‘ease of use’ and are therefore to be avoided. That view misses some key points;

  • Ladder options offer some huge payouts, relative to other trade types
  • Ladders provide options during volatile markets
  • Where traders expect large swings in price, a ladder provides higher profitability than a standard binary option
  • Ladders are fundamentally no more complicated than a traditional option
  • High frequency, low risk / low payout trades are possible with ladders.

The last point is worth expanding. In the above screenshot, the price level of 0.73992 can be traded above for 7.79% – Not a huge payout, but if a trader was confident that the rise from this resistance level was assured, it is a quick, low risk route to profit.

Winning Ladder Trades

Trading ladder options requires market awareness and some research. Although the same is true for other trading styles as well, these factors are extremely important for ladder trading. It is possible to win the biggest payout only if one is able to get a prediction correct which had low probability. A steep rise/fall is needed for an extreme prediction to be correct. This may happen if some important event related to the asset takes place. An interest rate announcement or profit warning from a major firm for example, may cause a large and sudden price correction. Traders need to stay aware of all the events to win high payout trades.
Similarly, high frequency trades for lower payouts rely on reduced volatility. The higher strike rate required means mistakes must be few and far between.

Ladder binary options offer another route for a trader to profit, but they need to be fully understood. They can be used as hedging tool or specialised in, in their own right. Not ever binary options broker will offer ladders – prices and payouts need to be constantly updated. So choose any potential broker wisely, and if ladders seem like an interesting avenue for profits, make sure the right broker is selected.

Ladder Option Strategy

Ladder options offer the highest payouts of all binary options types. To trade them effectively, you need a good strategy. This article introduces you to three great strategies for ladder options.

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The three strategies which you will learn in this article are:

  1. Trading ladders based on the ATR & moving average crossovers
  2. Using the ATR & the ADX to make negative predictions
  3. Trading resistance and support levels with ladder options

With these three strategies, you will know three very different approaches to ladder options. By understanding the spectrum of possibilities, you learn to adjust our strategies to your preference and create the ideal strategy for you.

Strategy 1: Trading Ladders With ATR And Moving Average

When you trade a ladder option, you face two challenges:

  1. Predicting the market’s direction, and
  2. Predicting the market’s range.

Tackling both challenges with the same tool is difficult. This is why this strategy uses two tools – one for each prediction.

Predicting the market’s direction with moving averages

Moving average crossovers are perfect for predicting the market’s direction. Moving averages calculate the average price of the last periods and repeat this process for all periods in your chart. They then draw the results directly into a chart, which creates a line.

This line moves slower than the market:

  • When the market is in an uptrend, the moving average will be based on periods that are lower than the current market price. The moving average will be higher than the market, too.
  • When the market is in a downtrend, the moving average will be based on periods that are higher than the current market price. The moving average will be higher than the market, too.

When the market changes direction, it switches from being on one side of the moving average to the other, which means that it has to cross the moving average. Consequently, the market’s crossing of the moving average is a significant event that indicates a change market direction.

This is the perfect event for our strategy.

  • When the market crosses the moving average upwards, invest in a ladder option that predicts rising prices.
  • When market crosses the moving average downwards, invest in a ladder option that predicts falling prices.

Now that you have the direction, you only need to predict the market’s potential range. This is why you need the ATR.

Predicting the market’s range with the ATR

The Average True Range (ATR) is a volatility indicator. It measures the true average distance the market has moved per period in the past.

Let’s use the example from our basic text on ladder options. Assume that you are trading the AUD vs. JPY currency pair with a current price of 91.226. The expiry of your ladder option is 1 hour. The ATR has a value of 0.1 on a 10-minute chart, which tells you that the asset has moved an average of 0.05 over the last periods. This value allows you to predict how far the market can move and which target price you should use for your ladder option.

Let’s assume that the asset has just crossed your moving average upwards and you want to invest in rising prices. Your broker offers you these target prices for your ladder option:

Name Price Limit Above Payout Below Payout
Price Level 1 91.200 54.23% 92.62%
Price Level 2 91.245 90.89% 55.44%
Price Level 3 91.291 158.29% 31.47%
Price Level 4 91.337 280.34% 11.32%
Price Level 5 91.382 530.43% 1.00%
Price Level 6 91.425 1011.23% 0.00%

Which of these target prices is the best choice for a ladder option? Let’s go through them one by one.

  1. Price level 1 (91.2) is lower than the current market price (91.226). Since you are predicting an upwards movement, this would be a very safe prediction. It would, however, also limit your payout to 54.23 percent. This is not profitable enough.
  2. Price level 2 (91.245) is above the current market price (91.226), but not by much. In a market that moves at a speed of 0.05 per period, it would take the market less than one period to reach this price. Since you are expecting an upwards movement, this is still a very safe prediction. It would get you a payout of 90.89 percent, which is better than price level one, but it is still not a lot.
  3. Price level 3 (91.291) is about 1.5 times the ATR’s value (0.05) away from the current market price (91.226). This sounds interesting. Remember: to win your ladder option; the market has to trade above the target price one hour from now. You have six periods until this happens (60-minute expiry, 10-minute chart). Not all periods of a movement point in the same direction, which is why the market is unlikely to reach a target price six times as far away as the ATR’s value. But a target price in a distance of 1.5 times the ATR’s value with a payout of 158.29 percent seems like a relatively safe bet to make a nice profit.
  4. Price level 4 (91.337) is a little more than two times the ATR’s value from the current market price (91.226). In an upwards movement, the market is still likely to reach this target price. This prediction is a little riskier than price level 3, but it gets you almost twice the payout – 280.34 percent. Most traders would prefer this investment.
  5. Price level 5 (91.382) is a little more than three times the ATR’s value from the current market price (91.226). This is a risky prediction. The market would have to move in the right direction for four out of five periods. If you are right, though, you get an insane payout of 530.43 percent, which means that winning one-quarter of your trades would still turn you a profit. Risk takers prefer this target price.
  6. Price level 6 (91.425) is more than four times the ATR’s value from the current market price (91.226). This prediction is too risky. While you would get a great payout of 1011.23 percent, there is almost no chance that the market reaches this target. It would have to move in the right direction for an entire hour. Stay away from this prediction.

With these assessments, the ATR has helped you to distinguish the target prices.

  • If you like to play it safe, use price level 3.
  • If you like to take risks, use price level 5.
  • Traders who are looking for a nice mix of risk and potential take price level 4.

Trade this strategy for a while and monitor your success. You will find that you prefer a certain ratio of target price distance and ATR. In our example, the ATR has a value of 0.05 and there are six periods until the option expires. If all periods pointed in the same direction, the market would move about 0.3. Some traders like a target price that is about half this distance from the current market price. They would invest in price level 5. Other traders might prefer a target price that is one-third this distance away, which would lead them to invest in price level 3.

Find your own perfect ratio, and you will be able to quickly and easily use the ATR to pick the right price level for your ladder option.

Strategy 2: Using The ATR & The ADX

In our previous example, we used the ATR to make positive guarantees – we predicted which price levels the current movement can reach. With this strategy, we want to do the opposite: we want to predict which price levels are out of the reach of the current movement.

We can accomplish this goal without the moving average. There is no need for a signal; we just want to know whether a price level is currently out of reach. Instead, we need a little more precision, which is why we need the average directional movement index (ADX).

Let’s use the same example as earlier: you are looking at a 10-minute chart of the AUD vs. JPY currency pair with a current price of 91.226. Your broker offers you these target prices for a ladder option with an expiry of 60 minutes:

Name Price Limit Above Payout Below Payout
Price Level 1 91.200 54.23% 92.62%
Price Level 2 91.245 90.89% 55.44%
Price Level 3 91.291 158.29% 31.47%
Price Level 4 91.337 280.34% 11.32%
Price Level 5 91.382 530.43% 1.00%
Price Level 6 91.425 1011.23% 0.00%

Since we are now making a negative prediction, we have to focus on the below payout. The important question is which price level the market can reach and in which price level it makes sense to invest. Let’s look at each price level:

  1. Price level 1 (91.200) is below the current market price (91.226). This is a bad investment. When you get payouts like these, your broker expects the market to move upwards. Otherwise, they would not offer such high payouts for below predictions. Therefore, there is no sense in investing in falling prices.
  2. Price level 2 (91.245) is above the current market price (91.226), but not by much. Predicting that the market will trade below this price level only makes sense when the ATR has a spectacularly low reading, for example01. Anything else, and this prediction would be too risky. With a payout of 55.44 percent, you have to win more than 65 percent of your trades, so this price level is not worth the risk.
  3. Price level 3 (91.291) is further from the current market price (91.226) but still very close. This price level would be a possible investment if the ATR’s value were very low, for example02. The payout of 31.47 percent is interesting for a negative prediction, but you need to know that you are making a safe prediction here.
  4. Price level 4 (91.337) allows you to make a safe prediction in most market environments. Even if the ATR read 0.3, the market would be unlikely to trade above this price level when your option expires. Some traders would even trade this value with an ATR at 0.4, but the relatively low payout of 11.32 percent requires you to make a safe prediction that can win you a high percentage of your trades.
  5. Price levels 5 and 6 (91.382 and 91.425) offer payouts of 1 percent and 0 percent, respectively. There is no sense in trading such payouts.

The point of this is that is difficult to choose the perfect price level based on the ATR alone. In most market environments, you could safely trade price levels five and six, but their low payouts make these price levels unprofitable. All other price levels require you to mix risk and potential. To know how to mix these factors, you need another tool. This tool is the Average Directional Movement Index (ADX).

The ADX evaluates the market’s directional strength on a scale from 0 to 100. Most traders interpret readings under 20 as a lack of direction and reading above 40 as a strong direction. These values help you to estimate which target price you should use for your ladder option:

  • If the ADX reads more than 40, be careful. When the market has such a strong direction, you have to plan for the worst. Assume that all periods before your option expires point in the same direction and pick the price level with the highest payout outside of this reach. In our example, there are six periods until your option expires. Price level 3 (91.291), for example, is 0.65 from the current market price (91.226). When the ATR reads less than 0.1, this is the price level to choose.
  • If the ADX reads less than 20, go for it. When the market lacks direction, it is time to get the high payouts. Risk-takers might even invest in a price level that is only as far as the ATR’s reading from the current market price, traders with a medium risk tolerance should use a target price that is twice as far as the ATR’s reading. In our example, this means that risk takers could even invest in price level 2 when the ATR reads 0.05, which is a relatively high value. All others should decide between price levels 3 and 4. When the ATR has a lower reading, all traders can choose price level 2.
  • If the ADX reads between 20 and 40, take moderate risks. When the market has a medium strength of direction, your risk should be medium, too. Pick an approach somewhere between the two examples above. When the ATR reads 0.02, for example, most traders will invest in price level three, which is a secure prediction but still gets a payout of 31.47 percent.

You might also exclude one or two of these market environments from your strategy. Risk-averse traders might only invest in this strategy when the ADX reads less than 20.

Strategy 3: Trading Resistance / Support With Ladder Options

This strategy is ideal for traders who like visual signals more than mathematical calculations. Resistance and support levels are important price levels that the price of an asset is unable to break.

For example, assume that an asset has been trading for around £99. It has tested the £100 barrier a few times but always failed to break through it. In this case, the £100 barrier becomes a resistance. Similarly, when an asset has traded for around £101 but failed to fall below £100, the £100 barrier becomes a support level.

In both cases, there seems to something that stops the asset from breaking through the £100 wall. You will never know what exactly stops the market, but this is unimportant. Apparently, traders are no longer willing to buy (in the case of a resistance) or sell (in the case of a support) the asset for £100.

This is all you need to trade a ladder option. When the market approaches a resistance line, you wait until the first target price with a reasonable payout comes within reach. Your definition of a reasonable payout is up to you. Most traders would want at least 30 percent, better 50 percent payout before they invest.

Should the market move closer to the resistance/support, you might be able to invest in the same resistance/support with a higher payout. Most traders would use this opportunity to make more money with the same prediction.

If the market breaks through a resistance or a support, you will lose all your options. You can make up for the lost money, though. When the market breaks a resistance/support, it has freed itself and is likely to move strongly. This is the ideal environment to invest in a ladder option that predicts a strong movement. You should be able to easily win a ladder option with a payout of 200 percent, which can make up for your losses.

Ladders – Summary

Ladder options allow for a variety of potential strategies. Depending on your risk tolerance and whether you prefer positive or negative predictions, you should tailor your strategy along the lines of the three strategies which we laid out. The possibilities are endless, but you now know where to start.

Types of Binary Bets – Ladder

In continuation of our series on binary options bets, we will discuss the Ladder binary option trade. It is a new variety of binary options trading which was introduced by IG Markets and is gaining popularity.

What exactly is the Ladder trade, and why does it get the name “Ladder”? A Ladder option is a type of binary option trade in which the trader is given a range of price levels which are lined at equal intervals like a ladder, for the trade to finish higher or lower than, at the end of the trading day. More simply put, a ladder binary option specifies that the market has to rise beyond a certain price level, after a certain period while the trade is active.

What this means is that there are several price levels to be set, and several periods to be set. The price levels are arranged just like the rungs of a ladder. For the trade to be successful, the asset has to have “climbed the steps” at certain times in order for the trade to be in the money.

Trade Example:

Let us imagine that the EURUSD is trading at 1.2789, and you want to trade a currency ladder binary trade with your broker. You want to perform a ladder trade with three price levels: 1.2750, 1.3023 and 1.3060. How do you trade this for the trade to be profitable?

In setting your trades, the first thing to do is to choose an expiration time, which for the purpose of this example, we will set to 2300hrs. The next thing is to look at the array of the trade this way:

  • EURUSD to be above 1.2750 1.20 (20% payout)
  • EURUSD to be above 1.3023 1.35 (35% payout)
  • EURUSD to be above 1.3060 1.50 (50% payout)

What does this translate into?

  • For trade number 1 to be successful, EURUSD has to close ABOVE 1.2750 (i.e. > or = 1.2751) by 2300hrs. The trader will then get a 20% payout.
  • For trade 2, EURUSD must be > or = 1.3024 i.e. must close ABOVE 1.3023 by 2300hrs for the trade to be successful. The trader will then get a 35% payout.
  • For trade 3 to be successful, the EURUSD must close ABOVE 1.3060, i.e. > or = 1.3061 by the expiration of the trade at 2300hrs. This will guarantee a 50% payout.

What this means is that the trader has to do his analysis on how the price action of the EURUSD will look like on the trading day, and then choose from any of the ladder trade options.

One strategy that a trader can use to play the ladder trade is the pivot point strategy. To use a pivot point strategy, the first thing to do is to plot the pivot points on the charts of your chosen asset using a pivot point calculator. This will show as three lines of support (S1, S2, and S3), a central pivot point and three lines of resistance (R1, R2, R3). The chart below illustrates how pivot points will look like.

Next, use the pivot points as guides to what the price could do during the day. Since we are using an intraday expiration, the trader could use a 1-hour chart for analysis. Typically, you would be looking at prices that are just above support levels for a bearish market, or in a bullish market, look for prices that are just above resistance levels that have been breached to become intraday supports.

With those points in mind, you can look at ways to set your trades, using these levels as a benchmark to set your ladder rungs. You would typically be looking at setting your ladder price levels at about five pips above the necessary levels. That way, you can be sure that your trade has a sure chance of success.

You can trade the ladder strategies with brokers like IGMarkets. If you are a US citizen, then try using NADEX.

Please practice making simulated trade calls using a demo platform. You can download a platform from FxPro, a forex broker that also offers trading in crude oil, spot metals and index futures, hence it is a good place to practice trade calls.

Long Call Ladder

The long call ladder, or bull call ladder, is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term. To setup the long call ladder, the options trader purchases an in-the-money call, sells an at-the-money call and sells another higher strike out-of-the-money call of the same underlying security and expiration date.

Long Call Ladder Construction
Buy 1 ITM Call
Sell 1 ATM Call
Sell 1 OTM Call

The long call ladder can also be thought of an extension to the bull call spread by selling another higher striking call. The purpose of shorting another call is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price rally explosively.

Limited Profit Potential

Maximum gain for the long call ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the call options sold. At this price, while both the long call and the lower strike short call expire in the money, the long call is worth more than the short call.

The formula for calculating maximum profit is given below:

  • Max Profit = Strike Price of Lower Strike Short Call – Strike Price of Long Call – Net Premium Paid – Commissions Paid
  • Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Calls

Limited Downside Risk, Unlimited Risk to the Upside

Losses is limited to the initial debit taken if the stock price drops below the lower breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the upside beyond the upper breakeven point.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying > Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid
  • Loss = Price of Underlying – Upper Breakeven Price + Commissions Paid

Breakeven Point(s)

There are 2 break-even points for the long call ladder position. The breakeven points can be calculated using the following formulae.

  • Upper Breakeven Point = Total Strike Prices of Short Calls – Strike Price of Long Call – Net Premium Paid
  • Lower Breakeven Point = Strike Price of Long Call + Net Premium Paid

Example

Suppose XYZ stock is trading at $35 in June. An options trader executes a long call ladder strategy by buying a JUL 30 call for $600, selling a JUL 35 call for $200 and a JUL 40 call for $100. The net debit required for entering this trade is $300.

Let’s say XYZ stock remains at $35 on expiration date. At this price, only the long JUL 30 call will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this call to close the position will give the trader a $200 profit – which is also his maximum possible profit.

In the event that XYZ stock rallies and is trading at $50 on expiration in July, all the call options will expire in the money. The short JUL 35 call will expire with $1500 in intrinsic value while the short JUL 40 call will expire with $1000 in intrinsic value. Selling the long JUL 30 call will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. The loss could have been worse if the stock had rallied beyond $50.

However, if the stock price had dropped to $30 instead, all the calls will expire worthless and his loss will be the initial $300 debit taken to enter the trade.

Note: While we have covered the use of this strategy with reference to stock options, the long call ladder is equally applicable using ETF options, index options as well as options on futures.

Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the long call ladder in that they are also low volatility strategies that have limited profit potential and unlimited risk.

Long Put Ladder

The long put ladder, or bear put ladder, is a limited profit, unlimited risk strategy in options trading that is employed when the options trader thinks that the underlying security will experience little volatility in the near term. To setup the long put ladder, the options trader purchases an in-the-money put, sells an at-the-money put and sells another lower strike out-of-the-money put of the same underlying security and expiration date.

Long Put Ladder Construction
Buy 1 ITM Put
Sell 1 ATM Put
Sell 1 OTM Put

The long put ladder can also be seen as an extension of the bear put spread by selling another lower striking put. The purpose of shorting another put is to further finance the cost of establishing the spread position at the expense of being exposed to unlimited risk in the event that the underlying stock price crashes.

Limited Profit Potential

Maximum profit for the long put ladder strategy is limited and occurs when the underlying stock price on expiration date is trading between the strike prices of the put options sold. At this price, while both the long put and the higher strike short put expire in the money, the long put is worth more than the short put. The profit can be calculated using the formula below.

The formula for calculating maximum profit is given below:

  • Max Profit = Strike Price of Long Put – Strike Price of Higher Strike Short Put – Net Premium Paid – Commissions Paid
  • Max Profit Achieved When Price of Underlying is in between the Strike Prices of the 2 Short Puts

Limited Upside Risk, Unlimited Risk to the Downside

Losses is limited to the initial debit taken if the stock price rallies above the upper breakeven point but large unlimited losses can be suffered should the stock price makes a dramatic move to the downside below the lower breakeven point.

The formula for calculating loss is given below:

  • Maximum Loss = Unlimited
  • Loss Occurs When Price of Underlying

Breakeven Point(s)

There are 2 break-even points for the long put ladder position. The breakeven points can be calculated using the following formulae.

  • Upper Breakeven Point = Strike Price of Long Put – Net Premium Paid
  • Lower Breakeven Point = Total Strike Prices of Short Puts – Strike Price of Long Put + Net Premium Paid

Example

Suppose XYZ stock is trading at $40 in June. An options trader executes a long put ladder strategy by buying a JUL 45 put for $600, selling a JUL 40 put for $200 and a JUL 35 put for $100. The net debit required for entering this trade is $300.

Let’s say XYZ stock remains at $40 on expiration date. At this price, only the long JUL 45 put will expire in the money with an intrinsic value of $500. Taking into account the initial debit of $300, selling this put to close the position will give the trader a $200 profit – which is also his maximum possible profit.

In the event that XYZ stock rallies and is trading at $45 on expiration in July, all the puts will expire worthless and the trader’s loss will be the initial $300 debit taken to enter the trade.

However, if the stock price had dropped to $25 instead, all the put options will expire in the money. The short JUL 40 put will expire with $1500 in intrinsic value while the short JUL 35 put will expire with $1000 in intrinsic value. Selling the long JUL 45 put will only give the options trader $2000 so he still have to top up another $500 to close the position. Together with the initial debit of $300, his total loss comes to $800. This loss could have been worse if the stock had dived below $25.

Note: While we have covered the use of this strategy with reference to stock options, the long put ladder is equally applicable using ETF options, index options as well as options on futures.

Commissions

For ease of understanding, the calculations depicted in the above examples did not take into account commission charges as they are relatively small amounts (typically around $10 to $20) and varies across option brokerages.

However, for active traders, commissions can eat up a sizable portion of their profits in the long run. If you trade options actively, it is wise to look for a low commissions broker. Traders who trade large number of contracts in each trade should check out OptionsHouse.com as they offer a low fee of only $0.15 per contract (+$4.95 per trade).

Similar Strategies

The following strategies are similar to the long put ladder in that they are also low volatility strategies that have limited profit potential and unlimited risk.

7 Binary Options

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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