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September 9, 2015

How China’s Slowdown Impacts Binary Options Trading

As China’s stocks crashed, the rest of theworld’s markets plunged. Worries over china’s falling huge economy have led to about a 5% drop in Europe’s markets. Wall Street was similarly adversely affected. Even the price of commodities suffered. Oil dropped by over 4% or a new six-year low at less than $39 per barrel. The recent developments have been alarming that the G-20 group of the world’s biggest economies is already rattled.

If you are engaged in binary options trading, should you be alarmed? What are the effects of these dreary economic developments on options trading?
Factors that Affect Binary Options Trading

To have a better grasp of the Chinese economy’s impact on binary options trading, it’s important to know the different factors that influence binary options. They are as follows:   

  • current price of the underlying asset
  • strike price of the option
  • time to expiration or maturity
  • prevailing interest rates
  • the probability that the value of the underlying asset will be above or below the strike price  

At least three notable markets are affected by China’s economic woes. These are stocks, commodities, and foreign exchange. All of these are common underlying assets in binary options trading – factors that affect binary options trading. Stock prices, as mentioned earlier, have been drastically falling after China’s economic data were released. Commodities, metals and oil in particular, have fallen except for gold, which is traditionally viewed as the safe haven. Foreign exchange has become very volatile. As China devalued the yuan, the euro and dollar went slightly up while the yen and Australian dollar went down. Currencies will be far from becoming stable as China’s yuan is bound for further devaluation in the medium term.

‘Taking Advantage’ of China’s Fall

Binary options traders are encouraged to take advantage of the volatility created by the fall of the Chinese economy. The idea here is that because of the high volatility created by the fears or worries caused by China’s alarming economic figures, binary options trading becomes more exciting. There will be several short-term movements in stocks, foreign exchange, indices, and commodity prices. As governments try to undertake efforts to address economic disasters, the markets tend to become more reactive especially in the short-term or, more accurately, the “snapshot” perspective. 
The Impact: Good or Bad?

So what impact does China’s economic downturn have on binary options trading? To be blunt about it, there’s really nothing much. After all, binary options trading is very much different from stock trading and other types of trading in the financial market. As Gordon Papes of Forbes wrote, no one can consistently guess how a stock or commodity performs within a short time frame. Because of the (very) short-term nature of binary options trading, nothing can be certain. Trends or patterns can be established over long periods of observation, not with extremely short durations such as minutes, hours, or days. 

There’s no reason to fear binary options because of economic disruptions stemming from China. If you are new to this type of trading, most binary options traders or platforms like Anyoption and Options XO provide downloadable educational materials on the topic, assistance, regular updates, and a reliable platform for trading. 

China’s declining economy arguably has no materially good or bad impact on binary options trading. The alarming fall of stock and commodity prices worldwide does not mean that binary options trading will become predictable, that binary options purchasers will simply have to choose “put” and make money out of the decision. Strike prices will not be predictable just because there’s a prevailing pattern of falling prices.
To sum things up, it can be said that binary options trading will not suffer from China’s economic woes because of its (very) short-term nature and the up-down/high-low nature of trade success. Binary options trading expiration dates are set within minutes or days. A week would already be considered long. As such, those who trade binary options are not really going to take advantage of patterns set by major economic developments like China’s decline. Also, in minutes, hours or days, prices are bound to unpredictably go up or down albeit in very minimal gradations. So if a stock falls from 200 to 150 in one day, there is still a chance for it to move up, to 151 perhaps in an hour, so those who chose a “put” option (thinking that the price would further go lower than 150) are not going to gain. Again, things will still be unpredictable so nothing much will happen with binary options trading.  

About the Author: Nikolai Kuzentsov (Article Archive Here) is a financial analyst and professional trader. He has extensive experience in stock market analysis, investment research and various assets such as FX, commodities, equities and bonds. Nicolai writes at Nikolaiknows.com.

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters. © EconMatters All Rights Reserved | Facebook | Twitter | Free Email | Kindle

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