Digital options are so popular nowadays. It is probably because they are easy to trade. Even novices will quickly find their way to understand the options market. Many kinds of options are giving the possibilities that you will not find on traditional stock or Forex.
The one area where digital options lose on a battlefield with the traditional trading markets is the expiration time. And you do not need to be a professional to discover some lacks there. There is a limited choice of trading opportunities and periods of expiration. You may end up losing only because you did not choose the right expiry time.
And so, what to do to avoid failure? What to do to select the right expiry period? These are the questions you are probably asking now and I would like to try to answer them for you. But before we will do this, let’s revise our knowledge about the options expiration period.
The basis for the digital options expiry period
Digital options trading is basically down to one question, will the price go up or down. But this question can be widened to the more precise one: will the price go up or down at a given expiry time. Whatever financial instrument you are using, currencies, commodities or stocks, you must answer the question about the level of the price at the expiry time you have previously chosen.
When you do your analysis, apply indicators and strategies and get the answer to the above question, you must click the right button. The green ‘Higher’ if you anticipate the price to be at a higher level at your expiry time, and the red ‘Lower’ if you think the price will drop at the time your trade ends.
Now, if your predictions were right, if your trade ends and the price is at the level you were forecasting, you will win. But if the price did not go in the desired direction, you would occur a loss.
Options trading and other traditional trading forms
The situation, for example, on the forex market looks quite different. Still, you need to answer the question about the price, that is will it move up or down. But what you do next?
You have several options. You can place a market order and buy instantaneously. You can also place a limit order which means your trade will be executed when the price reaches a specified level.
Then, you can follow the price movement on the chart and close the transaction whenever you feel the proper moment arrives. But you can also go away, do other things because you have the tool that is called take profit and stop loss. When you set them at some specific levels, the trade will be finished automatically after these levels are achieved.
Disadvantages of expiry period in options trading
Now you see why options trading is not perfect in the area of the expiration time. While you can always end your trade in traditional forms of trading, this is not always possible in options trading. There are certain exceptions that I will discuss later on in the article, but otherwise, you are stuck with your expiration time. And this limits your trading opportunities and makes it more difficult to be successful.
Consider the examples below:
- Usually, you will trade against your broker (the exchange market is an exception.) This does not place you in the best situation. It is not in the interest of the broker that you win, thus the entries and exits, which means expiry times, will work for your broker and not for you.
- Some systems are based on the exit strategy. And because of the limited expiration offer, you may be not able to apply the strategy.
- Other systems are based on the capability to close the transaction at a very precise moment. They require from you a certain portion of control over the exit. If you cannot decide on the exact exit moment, you will not be able to use this particular system.
- Reviewing your past trades is helpful in your development. You can learn a lot from the history of your own doings. But you may encounter a certain problem when it comes down to the expiry time. You cannot look back what expiry times were on the offer. Thus, you cannot draw conclusions for future trading.
You may be now a little overwhelmed by all the disadvantages digital options trading is carrying. But there is good news. I have some guidelines on how to choose the best expiry time for your options transactions.
4 tips on how to choose the right expiry time
Have a strategy
This is crucial for every trader. You must have a strategy. You must determine what are the best entry points. In traditional forms of trading, you would also determine some exit rules. But with digital options trading, you are not in complete control over the end of your trade so here, you should establish some guidelines for the trade exit.
If you, for example, wish to trade pinbars with price action, you should begin from the basis. You should know the candles’ formations well and be familiar with the principals of using price action. And then you should establish the rules for opening the position and some guidelines for exiting.
Adjust expiry period to the timeframe
It is very reasonable to learn from your past trades. Do some backtest as you would do in traditional FX. Make notes that include entry points and the exits which, if applicable, would work best. If the trades brought you a profit, you may have a good trading strategy with the potential to try it in digital options.
Thanks to the backtesting you receive a view on the perfect expiry times. By perfect, I mean the ones that make money for you. Now, if your broker permits you to set a custom expiry period, good for you. Just apply the perfect expiry times you discovered during the backtesting as they were stop-losses.
But if your broker does not allow any customization in expiry times, you have to do another trick. And you are not in a minority. In fact, most of the options brokers do not permit that you set your own expiry time. You can only select what they offer or do not trade at all.
Take a look at the picture below. It is a screenshot from the IQ Option platform. The broker offers some portion of flexibility in terms of expiration. Still, the choice is somewhat limited.
Now, if you are able to find an expiry time among the times given that is close to the stop-loss you would have set, that will be just great. Just choose it and be happy.
But if you cannot find such, then you will have to choose one that will be most reasonable with your transaction. Timeframes come in handy in this case.
Let’s say you chose the 1-hour chart and you were trading price action. You have noticed that most transactions that brought you profit, lasted a few hours. That gives you a clue that you should not consider an expiry time too short, nor too long. For instance, 20 minutes would be too short but 2 months would be too long. You should target expiration lasting a few hours.
All depends on the strategies you are dealing with. Think about a trader who positions at one of the political events in the long term. He would not be interested in the expiry time of a few hours. Maybe even several days would be too little. He would opt for a longer time.
One more example. A trader is using a scalping strategy. In his case, long expiration will not work. He must use a very short time, maybe as short as 1-minute.
Here I want to make a quick commentary on 60-seconds trades. They can be very profitable if you know what you are doing. Be careful, however, because such a short time seems to be extremely volatile. If you are a beginner, I would not recommend trading with the expiration of 60 seconds. High volatility is strictly connected to higher risk as the situation is more uncertain. Choose the strategies that work well for longer expiry periods.
Use a demo account
Many brokers provide a demo account that is always free of charge. You should definitely go for it. This is a great tool where you can practice without fear of losing money. So when you finally move to the live account, you are well prepared.
As I mentioned above, backtesting will not give you all the answers as you cannot check which expiry times were offered you at the given trades. But demo testing can bring you these answers. You will clearly see which strategies work and which do not.
With a little bit of practice on a demo account, you will find out which trades end up winning since the expiration periods you need are easily accessible. You will discover which trades always fail since you are not able to pick the expiration times you need. And which actions need just a little adjustment so they might end up successful. Maybe the expiration times are not ideal but with some changes, you achieve the outcome you desire.
I want to stress here once again what a wonderful tool demo account is. It will help you design a good plan, choose strategies and expiration times that bring you profit. You will be able to confirm the good systems that you have discovered during backtesting. And all this you can do without risking real money.
Exit a trade early
On some online platforms, you will come across a feature that is called the early close. It will not appear everywhere, so bear it in mind when you are choosing a broker. What is it?
The early close is a possibility to end the options trade before the expiration time.
The rules of using it will vary on different websites that allow this feature. A few allow the early close without any restrictions. Most will introduce boundaries in this respect.
Some of the limitations on the early close you may meet are:
- There is a possibility to use the early close only when your trade is going well;
- There is a possibility to use the early close only when your trade is losing;
- There is a possibility to use the early close only up to 5 minutes (or some other specified time) before your trade expires.
Therefore, it is necessary to find this kind of information on your broker’s website beforehand.
The brokers claim many traders do not use the early close option. And this is their mistake. They lose money because they omit this function. And those who remember about the possibility of closing a trade earlier are successful. Because the early close helps to avoid or at least minimize losses.
Thus, find out if your broker allows the early close and under what conditions. Then think your strategy through and use this feature if you see appropriate. With such a small potential of adjusting the expiry time, this tool gives you the power to choose the exit time.
There is, on the other hand, a tool known as a rollover. It allows extending the trade beyond the expiry period. But there are also some strict conditions on using it. Often you will have to increase the investment. So be careful and rational, but know something like this exists.
The expiration period is very important in trading. It works differently in traditional forms of trading and digital options trading. In the latter, it is a little bit more complicated and can be a challenge for newbies. Luckily, with some tips and practice, it is possible to choose the expiry times that will lead to your success.
Wish you profitable trading!