Digital Options (DO) are a type of Options trading, available both on PC and mobile devices. Though the main concept is quite similar to Binary Options, there is one difference that distinguishes Digital trading from the rest – the strike price. The strike price allows for much higher gains in comparison with Binary Options (on Digital it can go as high as 900%) with more control over the risks involved at the same time, so traders can pick the strike price manually, depending on their preferences and risk tolerance. Read on to learn how to trade Digital Options on IQ Option and get the highest returns possible.
What is the strike price?
Strike is an asset price that a trader has to manually choose when opening a deal on Digital Options. This is the price that, according to the trader’s expectation, the asset will reach within the expiration time. The strike price determines the possible profitability and the risk degree of the trade.
The further the strike price is from the current price, the higher the potential profit is, but also the higher the risk of losing the investment is. In the example above, the current rate for GBP/CAD is 1.725630 with an 87% payout. The chosen strike price at 1.729170 allows for profitability of 137%, as seen on the screenshot. Choosing this strike price means that a trader believes that the price will reach the price of 1.729170 and go beyond it before the deal expires.
A strike price can be chosen both for “Higher” and “Lower” trades. Traders can choose a strike below the current asset price and open a “Lower” deal with the expectation that the price will break through the lower strike. For “Higher” deals, a trader needs to choose a strike above the current price and the deal will be profitable in case the asset price breaks through it. Some strike prices allow for deals in both directions, which we will look into later.
Profit or loss?
There are 3 possible scenarios of the deal outcomes and they will determine whether the trader receives a profit or bears a loss of the investment. Let’s have a closer look at each one of them:
- The asset price reached the strike price and went beyond it within the expiration time. This is the best scenario for the trader, as in this case the deal is considered profitable and the trader receives the investment amount back to their balance, as well as the profit for the deal.
- The asset price didn’t reach the strike price within the expiration time. In this case, the deal is considered unprofitable and the investment amount does not get returned to the trader (the trader loses the investment amount).
- The closing price at the moment of expiration is equal to the strike price. In this case the deal will also close in a loss, as according to the IQ Option platform rules, in order for it to be profitable, the asset price has to not just reach, but to exceed the strike price.
Step-by-step opening a Digital Options deal on IQ Option
To open a deal on Digital Options, a trader needs to take the following steps:
- Choose the asset from the asset list and set the expiration time. The timeframe options available on Digital Options are 1, 5 and 15 minutes.
Expiration time is the determined timeframe for the running deal. The asset price has to reach and go beyond the strike price within that time in order for the deal to be profitable. Each expiration time option has its own strike prices.
- Select the strike price. As mentioned earlier, the strike price determines the potential profit and the risks involved. A trader may choose a strike price further or closer to the current price, or even trade with the spot price (the current price of the asset) by enabling the “current price mode”. Normally, the further the strike, the more profit you may get, but it also means more chances of a loss, as it is harder for the price to reach far targets in short periods of time.
It is possible to choose the option of “auto-selection of the nearest strike price”, in this case the nearest strike will always be pre-selected.
- Choose the investment amount. The minimum investment amount on Digital Options is $1. You can base your investment amount on your strategy and the risk management approach.
- Choose the direction – “Higher” or “Lower”. Once the strike price is selected, you can make your prediction regarding the price movement and choose the “Higher” or “Lower” option. Certain strike prices only allow opening a deal up or down, however, some strikes allow deals in both directions.
For instance, a trader can choose a strike that is already above the current price point and open a deal “Lower”. That would mean that the deal is already in profit at the moment of opening.
In the example below, a deal “Lower” was opened with the strike 0.711180, above the current price of 0.711130. The idea is that the price will stay below the strike, which will guarantee a profitable deal. However, often the payout for such a deal is much lower (in this case it is 7%).
In fact, the deal closes with a profit of +$0.08 based on an investment of $1. Of course, the payout will depend on the investment amount as well.
- Wait until the end of expiration or sell the deal prematurely. In case the deal closes at the expiration time and in the money, the trader will receive the stated profit. In case the deal is closed using the “Sell” feature, the profit may differ.
Digital Options have a large list of advantages that make this instrument a favourite for many IQ Option traders:
- It is easy to understand: opening deals only takes a few steps and the mechanics of Digital trading is straightforward
- Availability: DO are available on all devices, so you can trade them at any moment
- High profitability: up to 900% and can be adjusted with the strike price
- Control over risks: you don’t have to take extra risk if you don’t want to, just choose a closer strike or trade the spot price
- Early exit is available, if necessary
At the same time, Digital Options have some disadvantages that are important to remember:
- Risk: even though the strike can be adjusted, Digital Options are still quite risky, as the trader can lose the whole investment
- Less assets are available to choose from
- Short-term trading may provoke strong emotions, which can affect the trading approach and outcomes
Digital Options trading is exciting and challenging, as the trader has to predict the exact price point that the asset may reach. It is possible to trade with any amount, starting from as little as $1 and the profit can reach up to 900%. All of that is available with no extra fees, which makes this instrument extremely attractive for many traders.