Rollover Tool in Binary Options

How to use the rollover feature to protect your money in losing trades

Risk management is generally a key feature of binary options as the predetermine nature of the risk and reward are ingrained in the binary option trade.  When traders place a binary option trade they know in advance the most they will lose and how much they can gain. In addition to the benefits of a predetermine risk reward feature, traders can use a rollover tool on out of the money trades which helps extend trades if an investor believes that there will be a catalyst that will push the trade into the money.

A rollover option allows a trader to extend a live trade for a specific period of time for a fee. Traders should only consider executing a rollover strategy only on live trade and only when you are recording loss.  Generally, a rollover can only be implemented only once per trade.

Which Broker offers the Rollover Trade Feature?

An example of a binary options broker that offers the rollover feature is TradeRush.com. If you sign up now you’ll also receive a $5,000 first deposit bonus.

rollover

Rollover Trade Example:

Let’s assume a trader places a daily binary options call on the EUR/USD currency pair.  The trade pays out 80% on $100 dollars if the price is above 1.30 at expiration.  The EUR/USD is printing 1.2990 with 30 minutes before expiration, but the trader has confidence in the trade, since it moved down to 1.2940 earlier in the trading session after the trade was placed, and has moved back to 1.2990 over the past 2 hours.

Additionally, there was some fundamental news that was negative for the dollar during that last 2 hour period, which the trader believes will likely weaken the greenback over the next trading day.  In this context, the trader is looking to extend his trade into the next day in an effort to generate a profit from a trade that in his mind will play out over another 24 hours.

The rollover is a risk management tool that comes with a cost.  If you want to use a rollover, you must understand that a broker will charge a commission that is usually as high as 30% of the trade value. Most of the brokers will let you execute rollover on positions that has less than 20 minutes before the expiration.

Calculating the Risk to Reward of the Rollover Option

The additional cost of placing a roller changes the risk / reward profile of the trade.  When a trader chooses to take advantage of this feature they should think about the risk relative to the reward and relative to a completely new trade.

For example, let assume a trader places the EUR/USD trade at 1.30 on $100 dollars.  The trader is risking $100 to gain $80 (100:80) on a EUR/USD call option.  If the price as discussed earlier is 1.2990, then a rollover would change the risk reward to assuming $130 of risk to gain $80 (130:80).  If the EUR/USD increases 11 pips then the trader is in the money.  This compares to exiting the trade, and placing a new trade where the risk is to gain $80 and risking $100 at 1.2990.

This becomes a judgment call, for an investor. The  trade turns into an above or below trade since the reward is only captured at higher levels for a call option.  If the amount is relatively small such as 11 pips the risk reward is likely suitable, but if a trader is rolling over and needs to gain 60 pips or a big figure they might considered generating a new trade.

When You Should and Should Not Use the Rollover

You want to use rollover when your analysis of the direction of the security is correct but you need more time for the trade to unfold in the direction you chose. If your  trade is in the money or looks like it will easily close in the money then adding additional money and time risk to your trade is unnecessary and a waste of money.

You should avoid using the rollover when your trades turn against you immediately and the risk is worth less than placing a new trade.  Let’s say the market drops on unexpected news and your trade moves out of the money.  Adding an additional 30% to the transaction where the chances of returning to the initial point are less than a new trade at current levels makes the risk / reward on the trade ill advised.

Adam

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Adam is an experienced financial trader who writes about Forex trading, binary options, technical analysis and more.

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