How to trade Binary Options on Stock Indices

What are the features of binary options trading and how to trade on stock indices and which brokers provide favourable terms on them?

Binary options attract many traders (especially newcomers to the financial market), as they are considered a simpler financial instrument than classic Forextransactions . Modern BO brokers offer a large selection of assets for trading , where, along with the usual currency pairs , there are stock market shares and stock indices. And although such assets are so far less popular than foreign exchange instruments, they also have their advantages.

Major stock indices

A stock index is a complex asset that is formed from quotes of several stocks (from 20-30 to 1000). As a rule, stock indices are linked to a specific exchange and are formed from the stocks traded on it.

The following indices are best known and liquid:

•         S&P 500 — formed from the shares of the 500 largest US companies;
•         Dow Jones 30 — shares of 30 largest industrial corporations in America;
•         NASDAQ 100 — shares of the 100 largest high-tech companies (traded on the exchange with the same name);
•         DAX 30 — shares of 30 largest companies in Germany;
•         FTSE 100 — shares of 100 leading companies, traded on the London Stock Exchange;
•         Nikkei 225 — shares of 225 largest companies in Japan.

Benefits of Index-Based Binary Options Trading

Binary options on stock indices have all the benefits of BO:

1. Minimal analysis is required to make a decision to open a trade. Trading systems for options, for the most part, are extremely simple, and after buying an option, all that remains is to wait for the result, without having to take any further action;
2. You can start BO trading with a minimum amount.

In addition, the stock index as a trading asset for binary options has its own advantages. In particular, it is less volatile than stocks, as their price can be affected by any important news directly related to this company. Most indices include from several dozen to several hundred stocks, and the problems of one particular business, although they may slightly lower quotations, are unlikely to cause a serious collapse.

On the other hand, indices are often easier to predict than currency pairs. The price of the index fundamentally depends on the state of affairs in all companies included in it, as well as on the country’s economy as a whole. Thus — the index is tied to the real business, and to its successes or failures. It is much more difficult to take into account all the factors affecting the exchange rate of the national currency.

Of course, studying the state of affairs in one company and trading only its shares is easier than being aware of all the important information about the market as a whole, but the question of volatility remains. In addition, BOs on the index are traded around the clock, 5 days a week, like Forex currency pairs, and the trading hours for shares are tied to the opening hours of the main exchange.

BO trading strategies for indices

Typical index options trading strategies are almost indistinguishable from conventional BO trading systems. As for trading based on fundamental factors, it all depends on a detailed study of information about a specific market and making decisions based on the data obtained. As a rule, such trading is carried out in the medium term, which is not allowed by all brokers .

Let’s look at a few simpler strategies for BO index trading.

Signal trading

The easiest way, which does not require trader training and is suitable even for beginners, is trading by signals. As a source of signals, you need to choose a reliable and proven service — for example, investing.com.

Going to the site and selecting the tab «Technical analysis / Summary technical analysis» in the main menu, we get to the page where data on the main indicators of technical analysis is displayed. Then you need to select the «Indexes» tab.

The table displays data for all major world indices. Trades are opened when the recommendations for all four timeframes are “Actively Buy” or “Actively Sell” (respectively, a buy or sell option is opened).

Indicator trading

This method will require independent analysis, but less experienced traders can start with simple systems such as trading with two moving averages . In the future, it can be supplemented with other technical analysis tools , increasing the accuracy of signals.

For trading , two moving averages with periods of 10 and 20 are set on the chart . This indicator is present in any platform or online chart .

The signal to open a Call option will be the intersection of a fast 10-period moving slow 20-period moving average from bottom to top. A signal to open Put is a crossover of a fast slow one from top to bottom.

The optimal timeframe for trading is 15 minutes, but this TS is quite versatile and suitable for any chart. It is better to choose an expiration date of 4-5 candles , so that the deal can be closed with a plus, even if one of the candles moves the price in the opposite direction.

Bollinger Bands + Stochastic

A more advanced version of the indicator strategy involves the use of two instruments: Bollinger Bands and the Stochastic Oscillator . Bollinger will act as the main signal provider, and Stochastic will be a filter that filters out the least promising ones in order to reduce the number of potentially losing trades.

The trading algorithm is as follows:

1. A Call option is bought when the price crosses the lower border of the Bollinger Bands and then enters the channel again. At the same time, the Stochastic should enter the oversold zone (below level 20), and then exit it.

2. If the price crosses the upper Bollinger band, first from the bottom up and then back, and the Stochastic leaves the overbought zone, a Put option is opened.

Trading is carried out on the hourly timeframe. The option is bought for 3 hours.

Expiration period of options

Stock indices are a somewhat more inert instrument than currency pairs, so trading them on turbo options is impractical. Regardless of the chosen strategy, it makes sense to open deals only with an expiration date of one hour or longer. If other conditions are strictly prescribed in the trading system, it is better not to use it for trading BOs on indices.

When choosing a broker for trading, it is recommended to immediately pay attention to the conditions for the expiration period — some companies limit the maximum time for opening a transaction to a day or even several hours.

Conclusion

Binary options on stock indices are quite an exotic trading instrument, but it has its own advantages and therefore is gradually gaining popularity. So far, few brokers provide access to trading such assets, and the future growth in the popularity of BOs on indices directly depends on the increase in supply in the market and, accordingly, an increase in the percentage of payments on options due to increasing competition.