Type of Binary Options: Tunnel
The Tunnel binary set is a type of binary options trade where one trade buys a contract to bet on whether the price action of the asset he chooses will stay in a price range or break out of that range. It is also called ‘boundary binary trade’ or ‘In/Out binary trade’.
You should keep in mind that there are two variations of the In/Out bets. Both variations are offered by a few brokers. However, most brokers only offer the conventional variants, which are:
- Stays between/Goes outside
- Ends between/Ends Outside
In the first case, there are two options. If you choose ‘stays between’, it means the price has to stay within the tunnel and do not reach any of the price barriers that are the boundaries of the tunnel during the trade. If you choose ‘goes outside’, the price has to reach either of the price barriers before the expiry in order to gain profit.
In the second case, this is the conventional tunnel trade where the price must be either within the price barrier or strictly outside the top or the bottom price barriers by the expiration.
How does this trade setup work?
For starters, a trader needs to setup the trade by choosing the desired asset. Next is choosing the price range that are the boundaries for the ‘tunnel’. This range has a price ceiling and price floor. After that, the trader should pick the expiration time for his trade as well as the trade direction, which, in this case, is either in the tunnel (IN) or outside the tunnel (OUT). Once finishing all this, the trade can begin.
It does seem rather easy, doesn’t it? However, that is just in theory; the practice of this trade is quite a different reality.
In order to make an ‘IN’ trade successful, you have to assume that the price will maintain in a state of consolidation. Strictly speaking, the asset must be range-bound or trading sideways without any defined trend. This condition of trade normally exists before a major news event hit the market. Because the markets are often unpredictable, there is no certain way of knowing that the price of the asset will remain range-bound at the end of the trade. What makes the trade more difficult is that several brokers do not let enable traders to choose expiry dates at anything less than 5 to 7 days for a tunnel trade. This gives an apparently range-bound asset time to experience a major trigger to breakout and neutralize the trader’s position.
On the contrary, it takes another major breakout in order to put the trader’s position in the money again. Normally, you will be given a better payout from the brokers if you stretch the boundaries of your tunnels. In case of an ‘OUT’ trade, it is either stretching the tunnel boundaries for better payouts or limiting the boundaries for a smaller one. Even in these circumstances, it is not certain whether the breakout needed for a successful trade will occur or not.
So, how would a trader profit from this type of trade? Take a look at the image above. This is a simple depiction of the tunnel trade, with the yellow area being the tunnel, where an ‘IN’ trader wishes his asset to end up by expiration. On the other hand, an ‘OUT’ trader would wish his asset end up in either the green or blue area. You can use the trade definitions above the understand how to map out trade strategies for yourself.
There are multiple ways to trade tunnel binary bets. You can imagine the image above as a dart board, where it would be much more difficult to hit the yellow area than the green or blue area. This trade type will aim to use the ‘goes outside’ strategy to choose a trade.
Keep in mind that you just need the market price to reach any of the 2 barriers ONCE throughout the trade. Also, remember that this is different from the Touch/No Touch binary, where the traders have to choose the price barrier to be touched. In this example, the trade doesn’t have to define which barrier must be touched, which means any of the two barriers can be touched in order to make the trade successful. You are able to trade Tunnel Options with several brokers like BeeOptions or iOption.