Fence Strategy In Binary Options Trading
The Binary Options Fence Trading Strategy is designed to help binary options traders reduce the risk of investment through the use of binary options. Basically, the fence strategy requires the purchase of two option contracts on the same asset. This is because the trader needs to cover both sides of the market. Hence, he buys both “CALL” and “PUT” contracts to “fence” in the prices of the asset in between the strike prices of these two contracts. With this strategy, the trader is able to reduce his investment risk and also profit from the market even without really having to choose which direction the market will go.
For example, an underlying asset is presently trading at $10. He predicts that the price of the asset will rise within the next 15 minutes and thus buys a “CALL” contract for $500 to expire in 15 minutes. Initially, the market moves in favor of the trader until unforeseen events cause prices to fall. If the binary trader does nothing, the value of his investment will start to decline and ultimately leaves the trader out of the money (OTM). But with the fence strategy, the trader can reverse this undesirable situation and lock in his profit.
Suppose the binary options trader purchase a “PUT” contract for $500 when the price was trading at $10 after dropping from the peak of $10 just a few minutes prior. Assuming the payout is 80%, and the expiration price of the asset is between $10 and $15, the trader will be able to collect on both contracts earning a total profit of $800 ($400 + $400).
If the expiration price finishes ABOVE $10, then the “CALL” contract is in the money (ITM) while the “PUT” contract is out of the money (OTM). However, if the expiration price finishes BELOW $10, then the “CALL” contract is out the money while the “BUY” contract is in of the money. In either case, the trader’s losses are capped at $100 as the $400 profit from either contract will help reduce the loss of the $500 investment capital. The main danger of this strategy is when the expiration price is below $10 on the “CALL” contract and higher than $15 for the “PUT” contract since both contracts expire at different times. In such case, the binary options trader will lose all his investment capital of $1000. In order to avoid such case, the binary options trader must ensure that his analysis is right.
The fence trading strategy is a simple and good strategy to adopt when the conditions in the market are suitable for its implementation. Nevertheless, the strategy requires binary options traders to have some decent background knowledge about the market in order for its successful implementation.
Thank you for reading our strategy review, we all hope you’ll use this strategy with a lot of profits. If you are new to binary options trading you must trade with an EU regulated broker, you can visit our best brokers list and choose your favorite one. In addition, due to the legitimate willing to increase your monthly income from binary options it is highly recommended to combine your trading methods with a reliable and trusted signals service like Mike's AutoTrader but for more great services you are most welcome to visit our trusted services list.