The ladder option is a relatively new addition to the products now on offer from most binary brokers. Two or three years ago this option was unknown, but is now being taken up as a standard product offering. This approach is one familiar to vanilla options traders, and is generally referred to as the bull call ladder (or long call ladder), an extension of another strategy known as the bull call spread.
This is something we will look at in more detail later in the book. The ladder is created by combining three call options, on the expectation of low volatility in the underlying market but with a bullish tone. The opposite is a bear call ladder, or short call ladder, and is one where volatility is required. There is one significant difference between a binary ladder and a vanilla options ladder namely the risk profile.
Risk and reward in a binary option are capped. In a vanilla option they are not, and whilst they may have similar names, the risk and reward profiles are very different. Nevertheless, the binary world has adopted this term to describe a binary equivalent product, which in essence is a ladder of three strike prices with different expiries.
Whilst the principle of the product may be common from one broker to another, the structure of the product offering may vary dramatically.
This is a new product which is still evolving, and one which is also complex. Its longer term success will depend on whether it is embraced by the market as offering a solid methodology, or is viewed as simply another way for the brokers to stack the odds in their favor.The ladder trade is structured in the way you would expect. A ladder of strike prices with different expiry times. Those strike prices closest to the current market offer the lowest returns, whilst those farthest away offer higher returns.
The theory is that as the market ‘steps up the ladder’, the payouts are triggered accordingly as each strike price is achieved. You might be wondering why anyone would want to add a further level of complexity. After all, the proposition here is not only judging the direction of the market, the extent of any trend, but also the time this trend will take to develop. It should come as no surprise this is considered a more advanced product.
The reason it has attracted growing interest from binary traders is that some brokers allow them to create their own ladder. In other words to set the expiry times and the price steps, which are normally three strike prices, although some brokers offer five. The option expires in or out of the money depending on whether all or some of the strike prices have been met. If none are met then the option expires out of the money.
Tunnel:The tunnel, like the up/down product is another well established product offering, and is generally available from most binary brokers. Some brokers refer to it as the tunnel, others call it the boundary option or range option, and the concept is very straightforward. The binary is defined with a price above and below,and for the option to expire in the money, the price has to stay within the tunnel or range.
You can think of this as a congestion phase on a chart, with a support line below and a resistance line above. The analysis here is to find a market that is likely to remain rangebound, in a congestion phase for the duration of the option. If the price remains in the tunnel until expiry, it expires in the money. If the tunnel is broken, either above or below, the option expires out of the money.
Some brokers do offer variations of this product, sometimes referred to as the ‘in/out’ option, and these are generally as follows:Ends in the tunnel/Ends out of the tunnel ,Ends in the tunnel/Moves outside the tunnel The first is a variation of the standard product. Here you can select the option either ending in the tunnel or outside the tunnel, a choice between a lack of volatility (ends in the tunnel) and volatility (ends out of the tunnel).
In the second variation, here the option remains within the tunnel until expiry, or moves outside at any time to expire in the money.Hi/Lo:No not a misspelling. This is a variation of the up/down proposition, and of a tunnel option outlined above. Here the trigger is in forecasting a target range of a high and low price. A close above or below expires in the money, with a close between ending out of the money.
Target:As the name suggests this is a target that has to be hit, and so combines both direction and range. The target range is specified, either up or down, and if the target price is achieved the option closes in the money. If not, it closes out of the money.Pairs:Once again the clue is in the name, and whilst this product is less widely available, and generally only from a specialist binary broker, this approach is gaining in popularity. Pairs trading, like the ladder, has been developed from the vanilla options world.