Binary options can be used to trade almost anything that has a fluctuating level. This may include; interest rates, indices, forex rates, stock and commodity prices among others. While binary options trading allows traders to access hundreds of financial assets from all over the world, brokers are doing their best to further increase the number of assets they offer. In that regard, pair binary options trading has been developed.
How it Works
Two financial assets that are already being supported by a broker are quoted against each other. For instance, The price of gold may be quoted against the price of crude oil. In such a case you may see something like GOLD/OIL 20.2106. This is the price of one ounce of gold divided by the price of one barrel of oil. Usually, the same standard units that are used to measure financial assets are used when trading pairs.
Consider the pair mentioned above. The current level stands at 20.2106, but the trader expects crude oil prices to increase due to financial instability in the middles east. This means that the level of this pair will decrease in the near future. The trader opens a put binary option trade on the GOLD/OIL pair with a potential payout of 87% over a 24-hour period. If the spot price of gold increases, or the price per barrel of oil increases, the trade will most likely expire in-the-money, and the trader will get the payout. With an investment of $100 in that trade, the trader stands to gain $87, or lose $10, depending on the direction of the market.
Why Pairs are Popular
Usually, traders only have one asset to analyze before opening a trade. If only a few factors can affect the price or level of the underlying asset, making a prediction becomes easier, and that reduces the potential payout that traders can get from making the right prediction. Obviously, popular positions come with lower payouts. With pairs trading, traders must first analyze dozens of factors that may influence the level of each of the assets then look at their correlations before making a trading decision. This means that making a prediction is a daunting task, which makes the odds of getting it right very low. Consequently, the potential payout is highest for such trades.
Most traders know that all the underlying assets in binary options trading are correlated. Since nobody can be an expert in all the assets classes, traders may want to consider specializing in a few assets, including; gold, oil, euro, U.S. dollar and crude oil. This will enable them to successfully trade the different combinations of asset pairs that they are familiar with. Pair binary options trading is not for everyone. It is meant for traders who already have a good understanding of the most popular binary options trading assets.