How to Profit from a Range Trade

The financial world can be an intimidating place, even for experienced investors. With complex financial instruments (like binary options, which I introduced to you earlier this month), and complex strategies to trade them, it’s no wonder why most Main Street investors and novice traders feel left in the dust by Wall Street. But it doesn’t have to be that way…

While more complex than buy-and-hold stocks, binary option strategies can be incredibly lucrative for investors who know how to use them. And contrary to popular belief, they don’t necessarily need to be incredibly risky either.

Today I want to show you how you can profit from a binary range trade.

A binary option range play is a bet that the price of the underlying currency (or index, or commodity) will be below resistance and above support when the binaries expire. Remember, to technical analysts, resistance represents the “ceiling” — a technical price point that it will have trouble breaching. Support is the technical “floor.”

So with a binary option range play, you want the currency to stay between the barriers.

This kind of play is more likely to work if the strike barriers are far away from the market price. Of course, since it is more likely to work out, it will cost more to enter the trade. The binary option range trade, therefore, can be a lower total return play. But that doesn’t mean it can’t be incredibly lucrative if you use it right…

Let’s look at an example based on the EURUSD.

The chart above shows the EURUSD. The red lines represent the most out-of-the-money binaries offered by the Nadex this week. The resistance strike price is 1.3525 and the support strike price is 1.2925.

Since they are farthest out, the premiums will be higher. Betting that the EURUSD will be above 1.2925 by Friday at 3:00 p.m. costs about $80. A bet that the EURUSD will be below 1.3525 costs about $85. In total, the binary option range play would cost $165. We’d see a small loss if just one side plays out. But if both sides work out, the total payout would be $200. That is a 21% net total return in just five days!

So, as you can see, binary option range plays are a more conservative binary option trading strategy. But gains can also be large for binary range bets. My goal is to help you make binary options a bigger part of your investment portfolio — offering plays that fit your risk tolerance while offering weekly returns.

Stay tuned for more strategies that you can use in your own binary portfolio!

Abe Cofnas
Currency Trading Analyst for the Penny Sleuth

December 16, 2010

P.S.: If you missed my initial tutorial on binary options, and how to open your own demo account, you can read the whole Binary Options tutorial right here…

How to Profit from a Range Trade was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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