To collect premium using a forex binary option, one possible strategy is to buy or sell Deep In The Money (DITM) contracts. This binary strategy is not to be confused with credit spreads, as going long or short a binary option is always a debit or cost. Thus with the binary strategy to collect premium, you are receiving edge by initiating a higher probability trade of finishing in the money at expiration.
For example, if the GBP/USD is currently trading at 1.2340, a DITM contract could be 1.2300, with a buy price of 82.50. The risk is high at 82.50 and the potential reward is 17.50 but there is 40 pips of edge. With Nadex binaries, the risk is limited, but you could limit the risk further by exiting the trade if the underlying market hits the strike price. You could exit the trade with a loss of around $30-40 instead of the full $82.50 where the binary would be priced around 50 when the underlying is trading at the strike level.
Here’s an opposite, yet similar example. Still looking at the GBP/USD market, currently trading at 1.2340, let’s suppose you believe the market is going to go down. A DITM strike is 1.2380 sold for 22.25. The risk on this contract is $77.75. Again, this is high risk, but can be limited.
Both of these premium collection trades can make money if the market moves three ways. On the buy trade, as long as the market goes up, stays flat or goes down a limited amount, the trade will profit as time expires. At settlement, as long as the market is above 1.2301, it is profitable.
On the sell trade, as long as the market goes down, stays flat or only goes up a limited amount, the trade is profitable as time expires. In this case, at settlement, you want the market to remain at or below 1.2380 in order to be profitable.
Deep in the money binaries are already a true statement when the trade is entered. The market must simply continue in its current trend, stay flat or only slightly retrace. Then profit will be attained while time expires.
The goal on a Premium Collection Trade is to get in, collect as much premium as possible and get out. These trades do not need to be held until expiration. The trick to remember is that the trader can collect their premium as the binary’s time expires. Exercise care to further limit losses, as mentioned above.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.