Nominal interest rates are at historically low levels and the US Federal Reserve is the only major central bank among developed economies to embark towards tightening monetary policy.
With the Fed interest rate decision scheduled for 6:00M GMT, Wednesday this week it will be the catalyst for a sudden surge in volatility, which is the perfect environment for the binary options experts to make a profit. Trading with binary options strategies during economic news releases can be a very lucrative business.
The Fed interest rate decision is one of the most important economic news events not just for the US Dollar, but for the entire Forex market and other related asset classes. If the Fed hikes rates for the first time this year and for the second time since the great financial crisis of 2007-2008 than potentially the US Dollar can appreciate significantly. On the other hand, if the Fed refrains from raising rates, especially ahead of the US Presidential Elections than the market participants can be disappointed and subsequently the US Dollar can depreciate considerably.
Binary Options Strategies for Trading the News
Binary options trading is a compelling choice for news trading that will permit to make money either if the market is rising or falling. News trading is very popular among successful binary options experts. Before using binary options strategies the trader needs to first assert what are the market probabilities for that particular event risk and in our case we’re referring to the Fed interest rate decision.
It’s extremely important to have all of your research in place to get a gauge on the general sentiment of the market before you make a decision on what you’re going to be trading on and what type of binary options strategies you’re going to trade with.
It’s important not to overtrade, especially during news events, but if you have done the research, you have your tools in place, you know what you’re going to be trading on and you know your support and resistance level that you’re looking for then you have to act on that with commitment. If you follow this process, you’re following the footsteps of the binary options experts no matter the outcome of your trades, whether it is a loss or a profit.
The Advantages of Trading Binary Options Strategies
Many binary options experts find news trading very stressful, however, binary options trading doesn’t have to be stressful if you choose the right binary options strategies for the right trading environment. Price can be very volatile during news events and can quickly move against you. However, if we compare binary options to other sorts of trading, the binary options strategies do have an advantage when it comes to news events.
If we were to hold a position within a financial market, price could move drastically against us and we can end up losing a lot of money, whereas with using binary options strategies, even though the price is highly volatile during a news event, we still have that simple option of placing a call or put and our risk is limited.
My recommendation for trading scheduled economic reports are to use an economic calendar and secondly, you need to be patience and react quickly only when all the conditions for a trade are met.
Trading the News
As a financial trader, you have a number of options when it comes to trading scheduled news events. One of the most popular binary options strategies used by professional traders when trading high impact risk events such as the Fed interest rate decision is the Strangle.
What is Strangle?
Based on Investopedia definition: “A strangle is an options strategy where the investor holds a position in both a call and put with different strike prices but with the same maturity and underlying asset. This option strategy is profitable only if there are large movements in the price of the underlying asset. This is a good strategy if you think there will be a large price movement in the near future but are unsure of which way that price movement will be.“
Before moving forward, it’s important to understand the basics of how the news can impact currency pairs. Negative news can weaken particular currencies in which case you buy Put Options, while positive news can strengthen particular currencies in which case you buy Call Options. Scheduled economic data usually have forecasted figures and previously reported figures. Simply put it, trading the news using binary options strategies requires responding to the actual reported figures and set side by side these figures to the forecast and previous figures before putting on a trade. Not all scheduled news events are created equal, whereas the US rate decision can have a big impact, other news events like the Industrial Production can have a low impact.
Trading the Fed Rate Decision with Binary Options Strategies
We don’t have a consensus among the binary options experts and financial analysts when it comes to the September Fed rate decision as we still have some opinions that favor a rate hike, but the probabilities of an actual rate hike being actually very low. The Fed raised interest rates for the first time since 2006 in December 2015, but back then the majority of the binary options experts were almost 100% certain that the Fed would raise rates and in that scenario anticipating a US Dollar rally and subsequently EUR/USD falling would have been a wise decision. In that scenario, the simplest binary options strategies to use would have been to simply buy a Put Option (see figure below).
Because of the odds of a September Fed rate hike are being more evenly distributed it will be more suitable to use binary options strategies like the Strangle which involves buying Calls that are higher than current market price and buying Puts that are lower than current market price. This type of binary options strategies is non-directional and you don’t need to be worried whether the market is going to go up or down as a result of the Fed interest rate decision.
Lets’ assume that before the Fed interest rate decision the EUR/USD is trading at 1.1149. The probabilities of a Fed rate hike before the US General Elections are low; however, there is no clear indication of what the Fed will actually do. Possible binary options strategies are to invest more in the Call option and less in the Put option in anticipation that the EUR/USD is most likely to rally. The payoff can vary between 65% up to 95% of your initial investment
As a conclusion, you must remember to always use binary options strategies that fit into the current market environment and do your own research so you can be prepared to respond accordingly to the market dynamics.