An application worthy of much further analysis, but slightly beyond the scope of this article, is the use of binary options in combination with spot trading.Because binary options pay out a fixed amount if a strike price is penetrated,and settles in-the-money, they can be viewed as a form of rebate insurance.
For example, if a trader had a long position in the EUR/USD spot market, he can also select a sell binary option strike price in which he would have placed a stop.If the EUR/USD sold off and he incurred losses in his spot account at the same time, the binary account would pay off. This can offset part or all of the loss.
One can view the binary option as a form of hedge as well when doing correlated trades. For example, if a trader was trading crude oil futures, she can at the same time put on a trade in the opposite direction on the USD/CAD. Remember,they are from a technical point of view inversely correlated.
Being long on oil, and being wrong, would likely see the USD/CAD rise. Therefore, a trader being long on oil would also be long the USD/CAD binary to provide a form of a hedge. A USD/CHF trade may be used to hedge an S&P equity trade.A Word on Intraday and Intra-Hour Strategies So far, we have not directly discussed trading binaries, intraday or even intrahour.Actually, there is no difference from a strategy point of view.
These short-term duration trades enable the same strategies to be played but in a compressed time frame. An at-the-money bid/ask quote will still be essentially near $50 for an intraday binary. The difference, however, lies in the timing skills of the trader. Trading intraday requires very effective understanding of momentum, volatility, and technical analysis. In contrast, the weekly binary plays use fundamental analysis more effectively.