Understanding Diagonal Binary Options Spreads
Many binary options that are traded in markets today are referred to as ‘outright binary options’, but there are others such as binary options spreads that are referred to as ‘complex trades’. The choice of what to invest in should be based on the probability of making a profit with a certain binary option and the skills of the binary options trader. Binary options spreads are used by traders who want to lower the risk of their trades. There are different variations of binary options spreads and these are horizontal, credit, debit, vertical, and diagonal binary options spreads. Each variation is used in different circumstances.
Diagonal binary options spreads are spreads with different strike prices and different months. They are similar to horizontal binary options spreads in that they have different months, but the main difference is that in horizontal binary options spreads, the strike price is the same. Diagonal binary options spreads can be done as credit spreads or as debit spreads and they are made from either call options or put options. Diagonal binary options spreads are made by taking horizontal time spreads and moving the long leg to a different strike price – this means the term ‘diagonal’ refers to the fact that the back-month leg is not the same as the front-month leg.
A diagonal binary options spread is especially important for credit spreads. This is because of the potential gains on long back-month binary options. Unless the gap between the front-month leg and the back-month leg is too wide, the trade will close in-the-money. An important thing to note about diagonal binary options spreads is that they can start neutral or slightly out-of-the-money, but due to time value decay of the front-month binary option, the gap increases. Diagonal binary options spreads also work well with put binary options because if the value of the underlying asset moves lower, the long option will capture the rise in implied volatility that accompanies fears of decline in the price of the underlying asset.
If a binary options trader is interested in profiting from a quick change in volatility when the chances of a big move are low, then he/she only has to reverse the diagonal binary options spread, just like with horizontal binary options spreads.
To understand diagonal spreads well, a trader needs to train on the same because the trade is more complex that trade in normal binary options. There are many online courses on the same and these are convenience because they are cheap, convenient, and anonymous. However, you have to check the credibility of the source carefully because some courses are by people who are not experts in the field. To increase understanding of diagonal binary options spreads, a trader needs to understand different analytical methods since fundamental and technical analysis is important for the success of the trade. It is advisable to enlist the services of a binary options broker when dealing in diagonal spreads, especially if the trade is too big or if you are a novice trader.
