Bearish Strategy in Binary Options Trading

Bearish Strategy in Binary Options Trading

Investment success generally depends on the value of an asset rising. However, the nature of binary options trading means that you can make a profit during a bear market when prices are going down. And since bear markets can last for many weeks or many months, there’s plenty of opportunity for profit if you consistently predict falling prices.

Traditionally, the only way to make money in a bear market when options trading was to short sell the asset. That meant selling something that you didn’t actually own (having ‘borrowed’ it from a broker) and then buying it back at a lower price.

The problem here is that, if the price actually goes up rather than down, you’re buying back at a higher price than you sold it in order to return the asset and therefore make a loss on the whole,deal. An even bigger problem is that you have no way of knowing how much the price is likely to rise and so have no control over how much you might lose. It could leave you in big trouble.

Following a bearish strategy has become a lot more predictable and safe with the availability of binary options. Here you limit your maximum potential loss to the amount you’re willing to stake and so can’t lose more than you can afford. Additionally, you’re not actually buying the asset, you’re simply placing a put option that the price of the asset will go down, so you’re not required to make a large investment. You can also make a series of small trades so that, even of the price rises on the first ones, you’ll eventually finish up in the money if your overall strategy is correct.

Researching your Bearish Strategy

As with any investment strategy, a bearish strategy needs to be solidly based. Carry out technical and fundamental analysis before making any trades so you can be sure a bear market in your chosen asset is the most likely outcome.

Bad economic news and profit warnings may cause stock prices to fall while oversupply will result in reduced commodity prices. Similarly, technical analysis price patterns that show falling prices are likely to continue or an upward trend is due to reverse indicate that a bearish strategy should be followed.

Example of a Bearish Strategy Trade

The share price of ABC Inc has been flat recently and the annual accounts are due to be published shortly. You think these are going to show results below expectations and the share price is likely to fall as a result, so a bearish strategy should be followed.

If the price is currently $1.20 and the accounts are due in two hours, place a put option for $500 with a 75% return for a lower price three hours from now. If the price is $1.10 at the expiration time, you’ll receive your $500 stake plus a $375 return. An incorrect prediction will result in a maximum loss of $500.