What is a Boundary Option?

What is a Boundary Option?A boundary option is the only binary options type that does not require you to predict the future market direction. By taking the most complicated part of trading binary options out of the equation, boundary options offer the perfect trading style for new traders and traders that want to keep things simple.

Read more in our article What is a Boundary Option? below the table…

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What are Boundary Options?

To understand binary options, think of the market in terms of price channels. A price channel consists of a price above the current market price and a price below the current market price, creating a channel around current market movements. Boundary options define such a channel, and to win a boundary option, you have to predict if the market can break out of the channel.

For this purpose, boundary options define two target prices, one above the current market price and one below the current market price. To win your option, the market has to reach either target price. It is unimportant which target price the market reaches, and the market does not have to remain at the target price – one touch is enough.

In this sense, boundary options can be thought of as a touch option with two target prices, one to either side of the market. Consequently, both target prices of a boundary option are equally far away from the current price.

The payouts of a boundary option depend on how far the target prices are from the current market price.

  • Some brokers use target prices with a similar distance as the target price of a touch option, which results in payouts of 150 to 250 percent, about half of the payout of a touch option. With twice the chance to win, this system makes sense.

  • Other brokers want to keep payouts at 70 to 85 percent to match the payouts of high / low options. To justify the lower payouts, these brokers offer closer target prices.

  • Some brokers also combine both approaches, allowing the trader to choose from a high-yield version of boundary options with high payouts and faraway target prices and a traditional version with lower payouts and closer target prices.

Boundary options use the same expiries as high / low options. You can choose expiries from 5 minutes to a few hours, and some brokers also offer end of time, end of week, and in rare cases even end of month expiries.

Keep in mind, though, that a longer expiry will also results in target prices that are further away. One of the secrets to successful trading with touch options is to find the golden mean between long expiry and close target prices.

How to trade a boundary option

They key to successful investments with boundary options is finding market environments where you can expect a strong movement. Generally, there are two basic approaches that can help you with this task:

1. Trading the news

Important news influence traders strongly – but it is difficult to predict how. Boundary options are the only binary options type that allows you to profit from the knowledge that there will be a big effect without having to predict whether this effect will be positive or negative – an ideal offer.

Traditionally, trader were told to stay away from trading the news. Often, the market react in mysterious ways, dropping after news exceeded even the most positive expectations or rising after the release of bad news.

With this unpredictable nature, the market makes it impossible to invest on the assumption that what you consider to be good news will lead to rising prices and that what you consider bad news will lead to falling prices. As decades of analysis have proven, there is simply no connection.

This is an unfortunate dilemma, as the release of scheduled news would traders otherwise provide with an easy trading opportunity. With boundary options, you can finally take advantage of this opportunity.

For example, when the government is about to release important data about the economy, you know that the market will react strongly in either way. Shortly before the report is due to be released, you can therefore invest in a boundary option, thereby taking advantage of the resulting strong movement.

2. Use technical indicator

Technical indicators can help you to find more trading opportunities than waiting for significant news would allow you to find.

To find profitable trading opportunities, traders have invented momentum indicators. Momentum indicators such as the average true range (ATR) measure how far the market has moved on average over the last time. By projecting this result into the future, you can evaluate whether the market is likely to leave the trading channel defined by your boundary option.

For example, imagine an asset with a price of $200. If the market has moved $1 over the last 2 hours and your binary options broker offers you a boundary option with an expiry of 2 hours and target prices that are only $0.50 from the current market price, you know that there is a good chance that the market will reach one of the target prices.

If you invest in such a situation, you should be able to win a high percentage of your trades and make money with boundary options.

What is a Boundary Option?
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