Shorting – Using Binary Options For Shorts

In this guide, we cover all you need to know about binary options shorting. From how it works to getting started, risks, rewards and more. Find out if binary options shorting could enhance your trading portfolio.

What is Binary Options Shorting?

When trading a binary options contract, an investor can hedge their bet on whether a price will increase or decrease over a period.

In a short position, it is speculated that the price of a stock or security will fall. Conversely, in a long position, a trader will bet on a price increase.

Short selling is an advanced strategy that is primarily used by experienced traders. This is due to increased levels of risk which we will cover in more detail shortly.

Importantly, binary options shorting contracts can be traded on a range of instruments including forex, commodities, stocks and cryptocurrencies.

The Best Brokers For Shorting in the Netherlands

How Binary Options Shorting Works

A binary option short selling position is usually opened by ‘borrowing’ shares of an asset.

These positions will then be sold to buyers, ideally, at the market rate with a view to buying it back later at a lower rate.

Binary options short sellers make a profit on a drop in the price of a security, in contrast with a long investor, who profits from a price increase.

In a binary options contract, the price differential always lies between $0 and $100. For example, shares in Google might currently be at $90.

If a trader shorts these stocks, they would receive $90 from the sale. The $90 is then deposited into a brokerage account.

If the price of the stock now falls to $60, and the trader decides to close the position, it would cost them $60 to do so. This leaves $30 in the account (price paid – price sold).

The return on the trade is 33% (the sum left in the account divided by the proceeds from the original sale of the borrowed shares).

If the price dropped to $0, the return would be 100%. Alternatively, if the price rises, the loss may be greater than the initial investment.

Some brokers allow positions to be closed before the expiration date to limit losses but this is not always offered so it is worth double-checking.

Margin

To open a short position on a binary options contract, traders generally need a live margin account. Note, not all brokers offer binary options trading so be sure to check before opening an account.

Some brokers may also outline requirements that need to be met before they permit margin trading.

If you are looking to use a hedging strategy, again we would recommend scoping this out before making an investment.

 

Rewards

Binary options shorting offer some unique trading opportunities:

• Simplicity – binary options are straightforward instruments to get your head around, there are only two outcomes. It is this simplicity that forms part of their appeal, in addition to the potential for high returns.
• Fixed risk – risk is predetermined i.e. you know how much you stand to gain or lose before you take out a contract. Fixed risk means you won’t have any nasty surprises and it also makes it easier to plan, especially for those new to trading.
• Versatility – binary options shorting can be executed on a wide range of markets from forex to commodities, shares, precious metals and cryptocurrencies. Trade in multiple markets to diversify your portfolio.

Risks

Short selling binary options can be a risky game. If a trader has bought assets outright, and the price moves unexpectedly, they can only lose the full sum if the price moves to zero.

But a trader that has shorted a contract, could lose more than 100% of their investment. This is because there is no price cap on an asset.

Losses are potentially unlimited, subject to brokerage rules.

There are several key downsides to binary options shorting:

• Risk – binary options are inherently risky instruments, add short contracts into the mix, and it becomes highly risky. Of course, for the right trader, risk presents opportunities.
• Restricted – owing to the high levels of risk, binary options shorting is heavily regulated in global markets. Some traders may find it tricky to find brokers offering suitable contracts.
• Scams – as with any instrument, be wary of fraudulent operations. Always research a broker thoroughly before committing capital and where possible, opt for recommend brokers.

Getting Started

Follow these simple steps to get started binary options shorting:

• Choose a broker – first things first, you’ll need to select a broker. This is arguably the most important step. See our list of recommended brands for guidance.
• Select a market – both your interest and experience should be considered when deciding on a market – play to your strengths. As mentioned earlier, these contracts are not suitable for novice traders.
• Set your limits – when it comes to entry and exit positions, you’ll need to balance risk with reward. Some offer smaller profits in return for lower risk, while others expose you to much greater levels of risk but with it, the opportunity to earn big.
• Monitor & Close – some contracts will require traders to see a bid through to the predetermined date of expiration. Others may offer a get out early clause which can be taken if the price of an asset is not falling as anticipated. A get out early clause allows you to close a position before expiry in the hope of stemming further losses.

 

Bottom Line on Binary Options Shorting

Binary options shorting contracts are a high-risk, high-reward proposition. Still, for the right trader (with a sizeable risk appetite), they present a real opportunity.

From forex to stocks, shares and cryptocurrency, binary options shorting contracts can provide lucrative access to various markets.

FAQ