Choosing the appropriate time frame for trading binary options depends on a number of factors. Investors should first determine the reason they plan on using binary options. The time frame that is best suited for an investor is based on a number of factors which include, the payout they are looking for, how much time they have to devote to analyzing markets and trading, whether they are trading or hedging, as well as, the type of trading strategies they plan to use to trade binary options.
Binary options have many different types of payout profiles. These are options that allow an investor to receive a payout if the price of the underlying security is higher or lower from the market price of the security when the transaction takes place.
Usually, brokers provide a lower payout as the expiration period declines. Generally the payout increase as the expiration time of the option increases. Usually daily and weekly binary options have similar payout profiles that are at the high end of the spectrum. One reason short term options have a lower payout is that many believe short term options are easier to speculate on when compared to longer term binary options.
Investors who are looking to trade binary options as a part time opportunity where they are looking at financial markets once a day when they come home from work should stick to longer term binary options. The amount of time you have to devote to the markets is a key factor in determining which time frame you should use.
Traders who can devote an hours to trading should look at longer term charts such as daily and weekly graphs, and in turn trade daily or weekly binary options.
An investor who has a limited window of time to devote to analyzing charts or strategies should stick to evaluating long term or daily charts. Longer term charts paint a broader picture and it becomes easier to evaluate when compared to looking at many data points on a short term chart.
Longer term charts will also allow a trader to look at many assets compared to short term charts. Traders that spend most of the time analyzing price action and can devote time to watching intra-day market movements as well as economic and fundamental events can spend some of their time trading short term options and taking advantage of short term trends that take place intra-day.
Hedging is the process of offsetting positions in an underlying security with binary options. If an investor is looking to hedge securities, the best time frames to use are daily or weekly binary options.
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Short term binary options might not capture the breadth of the event an investor is looking to hedge so it is best to use longer term binary options to encapsulate the period the investor is looking to hedge. For example, support a trader owned a portfolio of stocks and his largest hold is Apple which is schedule to release its earning tomorrow after the trading session closes.
The only type of binary option that has an expiration that will cover this type of event is a weekly or monthly binary option.
Daily binary options generally expire 15 minutes prior to the end of a trading session and therefore any expiry shorter than weekly would fail to hedge Apple stock over the period when the company released its earnings. A trader should line up the strategies they generally employ with the binary options tenors they plan on trading. Each type of strategy can be suited to a different tenor and a trader should examine this scenario prior to risking capital.
For example, breakout strategies are usually best suited for short term binary options, while mean reverting strategies usually take a while to play out and are best employed with longer term binary options.
In the chart above a Candlestick breakout shows that the Nasdaq continued to rise over the next two trading sessions.
For traders that are using daily breakouts, they should consider using daily binary options which will incorporate the scope of their trade. Using 60 second binary options with a daily breakout might not encapsulate the period as the trade plays out, while a weekly binary option might see the breakout reverse after initially moving in a traders favor.
Pair trading binary options use mean reverting strategies and therefore are well suited with longer term binary options. Prior to engaging in specific types of binary options, an investor should analyze which tenor is best for their specific goals in trading binary options. Bollinger bands cover a specific standard deviation around a certain moving average. A trader might consider using either a daily or weekly binary options when the spread moves above or below the Bollinger high or Bollinger low as represented by the red arrows.
It is important to use binary options that can be in effect long enough for the mean reversion to play out. As stated in the introduction, choosing the appropriate time frame for trading binary options depends is another important factor traders need to consider before implementing a trading strategy. Complementing a strategy with a binary option tenor might be the difference between as successful binary option strategy and one that fails to generate profits.
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