Choosing A Strike Price

Choosing A Strike Price

In binary options trading the strike price represents the entry point or the price that the option is being opened at. In the case of a call option, the strike price is defined as the point at which the holder of an option can buy, and if considering a put option, the strike price represents the ideal moment to sell. Choosing the correct striking price is paramount to a successful option and therefore, knowing when to enter a trade is as important as recognising when to exit.

The right striking price should always be located with a balance of technical and fundamental analysis. There are many reasons for trading an option, but these always boil down to technical and/ or fundamental persuasions. So, it’s best to consider both before making your first move.
 
Technical Analysis
With technical forethought, a striking price should always correlate with the time frame upon which the analysis is made. For instance, imagine we are trading a bullish divergence on the four hours chart for the EURUSD pair. The expiration date should be anywhere between the end of day, week or even month (if the trade is taken in the second half of that respective month). A lower expiration date then any of the aforementioned is a risky choice – after all you want your option to have a good amount of time to reach its strike price. In the end it isn’t so much about the entry level that makes a strike price good, but rather whether or not the expiration date aligns with the time frame that the analysis was made.

After technical analysis we should know the direction of the trade and have an idea about the minimum expiration date to be set. Before placing a trade we should next consider the fundamental factors that will help us to fine-tune both strike price and expiry.
 
Fundamental Analysis
Continuing with the above EURUSD example, if the divergence on the four hour time frame appears on a Monday, but influential fundamental news (such as Non-Farm data) is due on a Friday, then choosing an end of the day Monday for an expiration date is not the wisest of moves. With the market likely to range until the NFP release, a one-week expiration date, or one that stretches to just before the economic event, should be favoured.

The economic calendar is particularly useful when discerning when these events are due and how important they are comparatively to one another. Most brokers provide their own calendar and you will be able to search through this in order to locate your asset of interest, or any public releases that you feel will directly affect it.
 
Conclusion
In short, a trade must be entered into at the right moment and for the ideal price. Pinpointing these features depends on your attention to detail, and dedication to either the technical or fundamental aspects of analysis. Whilst on the surface binary options may appear to be a 50/50 chance of landing in the money, there are plenty of strategies at play that can enable a trader greater advantage over another.