What Is A Strike Price In Binary Options

In binary options trading, traders predict whether the price of an underlying asset will rise or fall within a specified time frame. This simplicity makes binary options attractive to both new and experienced traders. In this article, we have tried to provide traders and investors with a comprehensive understanding of what a strike price is and its role in binary options trading.

Strike price definition

A strike price, also known as the exercise price, is the fixed price at which the holder of a binary option can buy (in the case of a call option) or sell (in the case of a put option) the underlying asset. It is a predetermined price level set at the initiation of the trade, serving as a benchmark for determining whether the option will expire in-the-money (profitable) or out-of-the-money (loss-making).​

Gold options chart, Source: PocketOption.com

In binary options trading, the strike price is crucial because it directly impacts the outcome of the trade. The simplicity of binary options, where there are only two possible outcomes, hinges significantly on whether the asset's price crosses the strike price within the specified time frame. Selecting an appropriate strike price involves considering various factors such as market conditions, volatility, and the trader's risk tolerance. An accurately chosen strike price can enhance the probability of a successful trade, making it a key element in trading strategies.

How strike price works on binary options

The relationship between the strike price and the asset's price at expiration categorizes the trade as in-the-money, out-of-the-money, or at-the-money:

• In-the-Money (ITM) scenarios. For a call option, the asset's price is above the strike price at expiration. For a put option, the asset's price is below the strike price. This results in a profitable trade.

• Out-of-the-Money (OTM) scenarios: For a call option, the asset's price is below the strike price at expiration. For a put option, the asset's price is above the strike price. This results in a loss.

• At-the-Money (ATM) scenario: The asset's price is exactly at the strike price at expiration. Depending on the broker's terms, this may result in either a profit, a loss, or a return of the initial investment.

Types of strike prices

There are two types of strike prices:

• Fixed strike prices are predetermined and remain constant throughout the duration of the binary option contract. When a trader enters a binary option trade with a fixed strike price, they know exactly at what price level the underlying asset must reach or exceed (for a call option) or fall below (for a put option) for the option to expire in-the-money. Fixed strike prices are commonly used because they provide clarity and predictability for traders, allowing them to plan their strategies and assess potential outcomes with certainty​.

• Floating strike prices, also known as dynamic strike prices, can change during the life of the binary option contract. These strike prices are typically adjusted based on market conditions, volatility, and other factors that influence the underlying asset's price movements. Floating strike prices are less common in standard binary options trading but can be found in more complex and advanced trading scenarios. They offer flexibility and can be advantageous in highly volatile markets where price fluctuations are frequent​.

We have prepared a comparative table highlighting the key differences between fixed and floating strike prices in binary options trading:

Factors influencing strike price

The main factors influencing strike price are:

• Market conditions play a significant role in determining the strike price of binary options. Factors such as economic indicators, geopolitical events, and overall market sentiment can influence the price movements of underlying assets. Prices can become highly volatile, making it more challenging to set an appropriate strike price​.

• Volatility refers to the degree of variation in the price of an asset over time. Higher volatility means greater price swings, which can impact the selection of a strike price. In highly volatile markets, the probability of the asset price moving significantly away from the strike price is higher, requiring traders to carefully consider the strike price to balance potential rewards and risks.

• Liquidity, or the ease with which an asset can be bought or sold without affecting its price, also affects strike price decisions. Highly liquid assets tend to have smaller price spreads and more stable price movements, making it easier to set a precise strike price​.

• Time to expiration - short-term options, such as those expiring within minutes or hours, may require different strike prices compared to long-term options expiring in days or weeks. For short-term options, traders may choose strike prices closer to the current market price to capitalize on small price movements. For long-term options, strike prices may be set further from the current market price to account for potential larger price movements over time.

Tools and resources for analyzing strike prices

• Charting tools. Platforms like MetaTrader and TradingView offer advanced charting tools to analyze price movements and trends. It is essential to choose a binary options broker that provides access to such advanced platforms.

• Economic calendars. Tools like the Economic Calendar provide insights into upcoming economic events that may impact strike price decisions.

• Volatility indicators. Using indicators like Bollinger Bands and the Average True Range (ATR) to gauge market volatility and select appropriate strike prices.

When choosing a broker, pay attention to the availability of tools and resources for analyzing strike prices, as well as the trading conditions offered. We have studied the conditions of top brokers and prepared a comparison table to make it easier for you to make a reasoned choice:

What are the common mistakes that traders make with strike prices?

Сommon mistakes that traders make with strike prices are:

• Overlooking market conditions - ignoring market conditions can lead to poor strike price selection. Traders should always consider the current market environment and adjust their strategies accordingly.

• Misjudging volatility - underestimating or overestimating market volatility can result in inappropriate strike price choices. Accurate volatility assessment is crucial for setting realistic strike prices.

• Lack of analysis - selecting strike prices without adequate analysis can lead to losses. Traders should use a combination of technical and fundamental analysis to choose strike prices that align with their trading goals and market conditions.

Selecting the right strike price is a crucial factor in the success of binary trading

Ivan Andriyenko Author at Traders Union

I know that selecting the right strike price is a crucial factor in the success of binary options trading. One effective approach is using "In-the-Money" (ITM) and "Out-of-the-Money" (OTM) strategies. ITM options reduce risk as they require less price movement to achieve profit, whereas OTM options offer high profit potential with greater risk. I frequently use volatility indicators such as Bollinger Bands and Average True Range (ATR) to determine the appropriate strike price based on market conditions.

A key lesson I've learned is the importance of considering market news and economic events. For instance, during the release of key economic indicators, such as unemployment data or central bank decisions, I adjust the strike price to minimize risks and maximize profits.

My advice to traders: always account for market volatility and remember to diversify your strategies. This will help you stay flexible and effective in changing market conditions.

Conclusion

The strike price determines whether an option expires in-the-money (profitable) or out-of-the-money (loss-making). Effective binary trading strategies depend on accurate strike price setting, considering market conditions and volatility. Tools like Bollinger Bands and ATR aid in this analysis.

Mastering strike prices helps in predicting market movements and making informed decisions. It enhances trading strategies and consistency in binary options trading.

FAQs

Related Articles

Best Binary Options Demo Contests

Peter Emmanuel Chijioke

2 days ago

Binary Options Signals – Top 6 Free Providers for Trading

Mikhail Vnuchkov

2 days ago

Best Binary Options Strategies You Should Know

Mikhail Vnuchkov

2 days ago

How Does The Martingale Strategy In Binary Options Work?

Mikhail Vnuchkov

2 days ago

Binary Options Strategy With 90% Win Rate

Anton Kharitonov

2 days ago

Team that worked on the article

Parshwa Turakhiya

Author at Traders Union

Parshwa is a content expert and finance professional possessing deep knowledge of stock and options trading, technical and fundamental analysis, and equity research. As a Chartered Accountant Finalist, Parshwa also has expertise in Forex, crypto trading, and personal taxation. His experience is showcased by a prolific body of over 100 articles on Forex, crypto, equity, and personal finance, alongside personalized advisory roles in tax consultation.

Learn about our editorial policies

Dr. BJ Johnson

Developmental English Editor

Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

Mirjan Hipolito

Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Glossary for novice traders

Cryptocurrency

Cryptocurrency is a type of digital or virtual currency that relies on cryptography for security. Unlike traditional currencies issued by governments (fiat currencies), cryptocurrencies operate on decentralized networks, typically based on blockchain technology.

Volatility

Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.

Binary options trading

Binary options trading is a financial trading method where traders speculate on the price movement of various assets, such as stocks, currencies, or commodities, by predicting whether the price will rise or fall within a specified time frame, often as short as a few minutes. Unlike traditional trading, binary options have only two possible outcomes: a fixed payout if the trader's prediction is correct or a loss of the invested amount if the prediction is wrong.

Strike price in binary options

The strike price in binary options is the price at which the underlying asset is valued at the expiration of the option.

Investor

An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.