Short Term Options

Short term options trading is popular with retail investors, providing opportunities in various markets. But while some investors use traditional options, others trade binary options, which offer fixed payouts and contracts that expire in just a minute or less.

This trading guide will provide a run-down on the fundamentals of short term options, from strategies and indicators to the best brokers and platforms. We also compare short term binary options with standard options to help you decide which instrument may best suit your needs.

Short Term Options Explained

While there is no concrete definition of what constitutes ‘short’, it is generally thought to be within the range of minutes to hours. The most common contracts tend to be 60 seconds, 2 minutes, 5 minutes, or 15 minutes. However, short term can also go up to a few days. These kinds of options tend to be binary options, as they are more closely associated with shorter expiry times.

Short term binary options contracts work in the same way as their longer term counterparts, in that they are all-or-nothing trades. A good prediction will see traders go home with a fixed payout, usually displayed as a percentage of the stake. A losing prediction will see the trader’s account debited with the initial investment.

Short term options typically ask traders to answer a straightforward question. For example, will the price of the FTSE increase or decrease in 1 minute?

Let’s assume an investor bets $1000 with a 45% payout.

Short Term Options Trade – Pocket Option

Potential outcomes:

• In 1 minute the price of the FTSE rises – The trader is right and wins $1,450 ($1000 + $450)
• In 1 minute the price of the FTSE falls – The trader is wrong and loses the $1000 stake

Note, short term options tend to have higher returns vs longer term options due to the volatility and risk involved. 

Short Term Options Vs Short Term Binary Options

When trading binary options, if the trader is incorrect about the direction of the price movement, they lose their entire investment. With standard short term options contracts, the loss is the premium (price) of the contract.

A winning binary options trade simply requires the investor to correctly predict whether the price of an asset will rise or fall. A standard options trader will profit from the purchase of a call contract if, at the expiry time of their short term option, the price of the asset has risen. This is because the trader purchased the underlying asset before the increase in price. They can now sell the asset at a higher price than what they paid. Conversely, a profit is made from a short term put option if the price of the underlying asset falls, and the trader sells the asset before expiry.

With short term binary options, the trader never owns the underlying asset – they are simply speculating on the movement in price. With standard options, the contract holder has the right to buy or sell the asset in question at expiry.

Overall, binary options are more straightforward, but providers come with less regulatory oversight and retail trading safeguards.

Pros Of Short Term Options Trading

• High returns due to volatility
• You choose the size of your position, so you can invest whatever you can afford
• Many binary options brokers offer ultra-short expiry times with contracts from just 30 seconds

Cons Of Short Term Options Trading

• Volatility and unpredictability mean short term options are high risk
• Traders do not own the asset when buying a binary options contract

Strategies & Indicators

Momentum Oscillators

One of the most common types of indicators, oscillators show traders the speed at which prices change by comparing price movements over time. Popular examples include know-sure thing (KST) oscillators and stochastic oscillators.

With candlestick charts, before the price moves in one direction for an extended period, there is typically a long body accompanied by either a long upper or lower shadow. This indicates high standard deviations, meaning there is little stability in the asset at its current price.

Volatility Indicators

These indicators don’t consider the direction of price movement, only the rate of price movement. Usually, when volatility sees a spike, it indicates instability in a market. For beginners, volatile markets should be avoided as predicting the direction of movement in the short term can be difficult without experience.

Some examples of volatility indicators include Bollinger bands or average true range. The greater the distance between the bands, the more volatile the market is.

Trend Indicators

Trend indicators take an average of the price of an asset to measure the direction and strength of a trend. If prices move above or below the trend line, it can be taken as an indicator of either a bullish or bearish trend. If the price consistently deviates from the trend in one direction, a new trend is created. Correctly anticipating the direction of the new trend is when profits can be made.

Volume Indicators

Volume indicators can help to measure the strength of a short term trend. When the volume of an asset being traded increases, it shows confidence in the trend as other traders are also following it.

The best short term options strategies combine a variety of indicators to accurately predict the direction and strength of a trend.

How To Compare Brokers That Offer Short Term Options

• Fees – Short term options brokers may charge deposit and withdrawal fees, commissions, and inactivity penalties. Pocket Option, for example, charges a 0.5% withdrawal fee if using a bank transfer or the Pocket Money system. Importantly, the top brokers will publish details of trading fees on their website. Alternatively, our reviews compare costs across the best short term options brokers.
• Range Of Assets – On which underlying assets can you speculate with short term options? Can you trade currencies, stocks, and commodities? Several top short term options brokers also offer opportunities on cryptos like Bitcoin, including Quotex.
• Customer Service – The best short term options brokers offer 24/7 support. Assistance is often provided through live chat, email or social media messenger. Leading brands can advise on platform queries, contract stipulations, and more.
• Education & Tools – Successful short term options trading is not easy, so traders should look for brokers with solid education bases that introduce strategies and give good trading tips and tutorials. This is particularly important if you are new to binary options trading. Other useful tools for beginners include copy trading.
• Payouts – Short term binary options brokers offer payouts of over 90% on popular assets like major forex pairs. Volatile assets like cryptocurrencies tend to come with lower profit potential.
• Minimum Deposit – Some brokers offer short term binary options trading with a low deposit of just $5 or $10. Again, these are good options for new traders. Also check the list of supported payment methods. Can you deposit with bank cards, e-wallets or digital currencies?

Tips For Trading Short Term Options

• Economic Calendars – Many brokers provide a free economic calendar with upcoming events and announcements. These events can be used to place short term options trades, anywhere from 2 days to minutes before the event happens. Key news events can include interest rate decisions, reports released on company numbers, government jobs reports, press conferences or companies releasing their quarterly income reports.
• Expected Movements – When trading short term options, traders need to be aware of implied volatility and the effects of how the market is expected to move. If you purchase an options contract for an asset widely expected to move in a specific direction, then the premium will be much higher and/or the payout may be lower. Expected movement can also make the market move less which may impact your returns.
• Money Management – Limit the size of your potential losses by not risking more than a set percentage of your total capital on a single trade. This could be 1% – 2% of your account balance.
• Trading Journal – Journals on Google Sheets or Microsoft Excel, for example, are a great way to keep track of your trades. Making notes on each trade including the date, time, and signals you used, can help you to identify which strategies and setups work for you.

Bottom Line On Short Term Options Trading

Binary options are one of the most popular forms of short term options. They are fast-paced, come with fixed risks and payouts, and are available on multiple markets, from stocks to forex to metals. Alternatively, retail investors can trade traditional options which feature some of the same characteristics but with added complexity.

Use our list of the top binary options brokers that offer short term options trading to get started.

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