Ladder Options
Ladder Options Explained
Ladder options is another binary options trade type which is not universally offered in the binary options market. Presently, it can be traded on the binary options platform of IG Markets, the UK based broker that first offered this binary bet to traders.
This binary bet type is unique in the sense that there are several strike price targets and not just one as in the other trade types we have discussed. The concept of the trade is that the total payout of the trade is dependent on the trader being able to take out all the strike levels, which are arranged like the rungs of a ladder. As the trade achieves a strike target, the trader gets a portion of the payout. With the ladder trade, the trader can either get a full payout or a partial payout depending on how many of the strike targets are hit by the asset.
Approach to a Ladder Trade
The Ladder trade type is not a straightforward binary option to trade, so what would be the correct approach to trading the Ladder option?
The components of a ladder trade are as follows:
a) Predicting the behaviour of the price of the asset.
b) Choosing several price levels that would constitute the rungs of the ladder as it were.
c) Selecting appropriate expiry times for each price level.
Predicting the Behaviour of the Asset Price
Notice we did not say predicting the direction of the asset price. This is because the ladder trade is not all about price direction but rather price behavior. There are times when the asset may experience a move in one direction followed by a retracement, and then resume its prior trend. At other times, the price of the asset may experience choppy movement with no defined direction. If a trader is able to predict to some degree of certainty the behavior of the asset, then this can form the basis for the next step in the process of setting the ladder bet.
Setting the Rungs of the Ladder
This simply means setting the various prices that the asset will have to breach in order to achieve a payout for that step. This is not supposed to be a random event, but a structured event done intelligently by using the following tools:
a) The pivot points: By using the daily pivot points or prices located in between them, it is possible for a trader to set at least two or three areas where the asset price will definitely breach. For instance, if the trader is required to set 6 price levels that each pay the same equity for a 78% payout, and he ends up achieving two strikes, that would translate into a payout of 26% which is not bad. Earning 26% is always better than earning zero.
b) Fibonacci retracement tool: By using this tool to plot possible points of price retracements, the trader can use any or all the five retracement points as possible price levels that would constitute a ladder. There is more information on the use of the Fibonacci retracement tool in this website.
We have dealt with how to choose an appropriate expiry time in other blog posts on this site, so we will not repeat that here. The same principles are used.
Approach to a Ladder Trade
The example below illustrates the approach to a ladder trade using the principles that we have illustrated above.
A trader named Erica plans to trade the ladder trade on silver, which is currently trading at 32.45. Using the pivot points, she chooses 4 price levels at 32.10, 32.90, 33.80 and 34.00 and enters the trade at 0800hrs. The total payout of 80% is arranged as follows:
The trade is arranged this way:
8% payout at 32.10 with expiry at 0900 hours.
15% payout at 32.90 with expiry at 1200 hours.
22% payout at 33.80 with expiry at 2000hours.
35% payout at 34.30 with expiry at 0800 hours the next day.
For this trade, silver dropped to 32.05 at 0855hours, stayed between 32.20 and 32.40 as at 1200 hours, spiked up to 33.82 by 2100 hours and eventually hit 34.50 by 0100 hours the next day. What are the trade results?
a) The first target was hit before expiry, so Erica gets 8% payout from this trade.
b) The second target was not hit by expiry, so Erica gets 0% for that target.
c) The third target was hit but not before expiry, so again Erica gets 0% for that target.
d) The fourth price was hit before expiry, so Erica gets 35% payout for that level.
Erica’s total payout for this trade is therefore 8 + 35 = 43%.
With the ladder trade, a trader can always get something from the trade if the price levels and expiries are set correctly.