One of the more interesting new facilities which is now supported by a number of binary options brokers is known as the ‘Take Profit’ feature. This gives the chance to close out of an open contract before the expiry time is reached.
Closing a contract prematurely means that you won’t e able to earn the full level of payout on the contact. Instead you deal at the current market rate that the broker is offering.
Also factored in is a small commission to the broker who may then sell this contract on.
Key Benefits of the Take Profit Feature
The main benefit associated with using the Take Profit feature is that it allows you to de-risk your binary options trading strategy. You can choose to bank a quick profit on your contract or get out of a position if the market starts to turn sour.
Rather than having to leave your contract open until the set expiry time, this feature lets you close out of a contract early to realize whatever profit (or loss) ratio is offered by the broker.
To activate the sell feature on your account you simply need to click the ‘Sell Option’ function which you can find on your open contracts. We have used the Banc De Binary platform in this example. Note that not all brokers may yet support his feature.
To understand how this works in practice, let’s look at two examples of how you might use this feature in practice.
Example – Contract in Profit
Let’s assume you have purchased a stock option on Google. You expect it to move higher so you buy a $100 CALL option offering an 85% return. The contract is set to expire at the end of the day (21:00 GMT).
Midway through the session you are sat nicely above the profit line. However you notice that many technology stocks are starting to sell off following the release of some bad news in the sector. You are unsure whether your contract will now end in the money.
Checking with your binary options trading platform you are offered a return of 50% to close your contract prematurely. This means that you will receive a pay-out of $150 ($100 stake + $50 profit). Using the binary options take profit strategy you can instantly terminate the contract and take your money off the table. You will still book a profit, albeit at a lower level than if you were to risk leaving the contract to run until the set expiry time.
Example – Contract Out of Profit
In this example you again purchase an end of day contract offering a return of 85% for an in-the-money expiry. As the session progresses the price looks increasingly unlikely to finish on the right side of the profit line.
You check with your broker who is willing to pay you a return of 25% on the contract. Rather than risk your contract expiring worthless, you can sell it back to the broker for the reduced return.
With some brokers the amount that you will receive from selling back your contract can be lower than the original amount that you staked on your contract. While you will suffer a loss, you can at least claim back some of the money you wagered rather than taking a full loss.
Pros and Cons
There are several Pros and Cons to the Take profit features offered by binary options brokers. As with many of the advanced broker features, you need to have a good understanding of the implications of using them and an idea of the circumstances where they should be used.
At its core, this feature works on the emotions of fear and greed. Brokers recognize this which is why they are keen to offer it to their traders. At the same time as lowering the risk of your trading, you are also reducing the amount that the binary broker will have to pay-out in returns. This in turn increases their profitability.
The main point to consider is that you risk never realizing your full potential profit. While it may be tempting to bank whatever profit is available, you need to do this in the context of your strategy. For example, many popular strategies require a minimum level of return per trade in order for them to be profitable. To consistently accept lower returns could well put the long term profitability of the strategy in jeopardy.
Ultimately when developing a binary options take profit strategy it really comes down to how much risk you want to take on your account. There are both positives and negatives when using this feature. Learning when to hold out to earn the maximum level of profit on your account and when to bail so as not to face an eventual loss is a skill in itself.
Building up your knowledge of the markets and learning from past experience is perhaps only way in which you will be able to identify the best moments to earn the maximum level of profit on your positions.