Risk free trading means trading without risk, and it sounds too good to be true. Trading without risk is the holy grail of day trading. Forever elusive, the holy grail of risk-free trades is yours if you know where to look. Luckily, I’m going to show you how to get them and how to find them.
I need to make something clear upfront: No type of market trading is ever 100% risk-free. Typically, when we use the term risk free, we’re referring to binary options trading. And all it really means is that your risk is reduced as much as possible. Without further ado, let’s dive into the risk-free trading meaning!
Risk Free Trading Introduction
You can trade binary options. Put simply, “Binary options” refer to a trade where the outcome is a ‘binary’ Yes/No answer.
These options will also pay you a fixed amount if they win (“in the money”). However, your premium is lost if the binary trade loses. In case you didn’t know, binary options share the same underlying factors as traditional options. Similarly, the same inputs determine their value when pricing them.
The only way binary options differ from standard options is in their payout structure on expiry.
Risk Free Binary Options Strategy
To minimize your risk as much as possible, traders buy two options in option + mode in different directions. At the same time, they then sell one option to benefit from each.
You are making a profit on the properly trending trade. Ideally, if you call it right, you minimize your losses, and the overall trade is profitable.
Does it happen all the time? No, but it does happen often and certainly gives you a chance to book a little bit of profit.
That is why trading this way is called risk-free trading. Robinhood option trading could be of use here.
Executing a Risk Free Binary Options Trade
- Buy a call option and then immediately place a put option after it.
- Wait for a clear trend direction.
- Early closure. Quickly sell the option that is not trending in the current price direction. The quicker you do this, the less you will lose. Selling off the option that isn’t trending, you will typically keep your losses under 25%.
- Wait as long as possible for your second option to expire.
So, how can you achieve maximum profit on your risk-free binary options trade? Let the trade reach its expiration.
When Price Goes Against You
Alternatively, you also have a chance to sell both options for profit. Let’s imagine a scenario where the price takes a sharp decline.
While waiting for the market to turn around, the trader sells a “put” option at a profit. Finally, they profit on the second “call” option once the market turns.
What Is Risk Free Trading?
A simulated trading account is as risk-free as possible for trading. You’re not using your own money. Some people hate not having skin in the game. However, it’s a great way to perfect your trading style before you go live. As a result, you’re not blowing up your trading account. We have free online trading courses if you need help getting started as a trader.
Drawback of Risk Free Trading With Options
Time commitment.
One of the major drawbacks of attempting to trade options risk-free is the constant tracking of expiration dates. You must be on the ball because you must sell the option just before it expires.
Risk Neutral Butterfly Options Spread
A butterfly option spread is a risk-neutral options strategy with limited downside risk. We combine bull and bear call spreads when the underlying price isn’t moving much.
What makes this strategy so popular is its risk-free exposure. Even though your profit potential is somewhat limited, you can sleep at night. Beyond that, it’s one of the few options and strategies that work well in a small account.
Constructing a Butterfly Options Spread
Step 1: Buy a contract with a 45-55 day expiration slightly below the money in an equity market ETF like SPY.
Step 2: Buy a second contract if the price of the underlying trades is higher. Doing so will stretch out the expiration break-even lines. And if prices continue increasing, you can roll the first butterfly up.
Your goal is to keep the market trapped under the expiration break-even lines. While at the same time not incurring too large a loss. And as you know, the game’s name is to limit your losses and protect your account.
Because the risk/reward ratio is relatively favorable, this strategy is more forgiving to the new trader. Another benefit of trading this options strategy is that the position will typically make money on the downside due to skew. I won’t go into much detail here, but we use a skew to describe the implied volatility of options at different strikes.
