If you are new to the binary option trading world, the title may seem a little complex but eventually it is really simple. Let us quickly explain you the mechanisms of buying In-The-Money binary options and the advantages associated with such strategy. When you want to buy a binary option, you should definitely understand the points developed below if you want to increase your potential performances.
At any point in time between the opening of an option position and its maturity, the option can be at three different stages: Out-Of-The-Money (OTM), At-The-Money (ATM) and In-The-Money.
Out-of-The-Money (OTM) – An option is deemed Out-Of-The-Money when the position is losing money. It then corresponds to the conditions where the underlying asset price is below the strike level for a Call (a High binary option), and the conditions where the underlying asset price is above the strike level for a Put (a Low binary option).
At-The-Money (ATM) –This corresponds to the conditions where the underlying asset price of your option is at or around the same level as the strike price. At this point in time, the potential profit of your option is extremely volatile since the slightest asset price move can turn your position into a profit or a loss.
In-The-Money -This corresponds to the conditions where your option is generating a profit. It then corresponds to the conditions where the underlying asset price is above the strike level for a Call, and the conditions where the underlying asset price is below the strike level for a Put.
The key difference between binary options and traditional options
One key difference between traditional options and simple binary options is that you have to select a strike for traditional options. When you trade binary options you almost always buy or sell At-The-Money binary options since the strike of the option corresponds to the live price of the asset and you just have to determine if the asset price will go up or down until the maturity.
With traditional vanilla option, the strike corresponds to the price at which you will have the right to buy / sell the asset at the expiry of the option. Indeed, an option is nothing more than a contract that gives you the right to buy (for a call) or sell (for a put) a specific asset at a predetermined price (the strike price) at one point in the future (the maturity). With traditional binary options (High / Low binary options), the strike corresponds to the price of the underlying level at the moment you open the position and is refreshed every couple seconds.
Some brokers enable you to trade different binary option strikes
Some brokers, such as IG Binary, Anyoption with the 0-100 Binary and Interactive Option with ladder options let you choose between different strikes. The strike is no longer the current price of the underlying as it is by default with most binary options brokers. In simple terms, if you buy a Call with a strike that is below the underlying market price or a Put with a strike that is above the underlying market price then you’re buying an In-The-Money binary option.
As you can guess, the further In-The-Money the option is, the lower the return. It means that for a call, if you chose the option with a strike lower than the current price, the proposed return on this call will be lower than the proposed return on the call with a strike that is equal to the current price. This is because the underlying asset needs to increase much less in the first case in order to make a profit. The broker thus compensates this lower amount of risk taken with a lower return and a lower payout. Returns with In-The-Money binary options never reach more than 30% but the probability that you achieve this return is much higher. As in every trading strategy, it ends up being a tradeoff between risk and reward. With an In-The-Money call for instance, the underlying market price doesn’t have to even move and actually has a little wiggle room where it can retrace, but still needs to be above the strike at expiration.
Examples and advantages of In-The-Money binary options
Let’s compare two strategies with two different binary option strikes. Let’s pretend that the live EURUSD price is 1.35673 and we are bullish on the euro. We consider two different High binary options with strikes 1.35582 (In-The-Money) and 1.35677 (At-The Money), with maturity 10 minutes.
- The High binary option with strike 1.35582 and maturity 10 minutes offers a potential return of 25%
- The High binary option with strike 1.35677 and maturity 10 minutes offers a potential return of 81.35%. This one is comparable to a traditional High binary option proposed by most brokers.
The first trade is at a return disadvantage to the first since the EURUSD doesn’t have to increase in even has a little room to decrease to turn your position into a profit. This additional leeway is compensated with a lower return of 25%. If you bet $100 on the first option and the EURUSD falls below 135677 but stays above 135582 until maturity, you end up with a quick 25 dollar profit. This strategy is great for binary option beginners as it provides you with a little safety net. The asset can go in the opposite direction but as soon as it remains above your strike y you generate a profit. Of course this payout is a lot lower than with traditional binary options but at least is much more achievable.
Don’t hesitate to have a look at our detailed review of the Binary 0-100 options with Anyoption or our test of IG binary and use our secure links to access the broker websites and buy your first In-The-Money binary option.