The core of Binary Options involves taking either of two opposite positions on an asset for a specific period. The position you take, the period, and the amount you risk are specifics; which pretty much gives Binary Options a hardline image. In finance, flexibility is desirable: and in Binary Options, tools or features that increase flexibility from these ‘hard nut’ specifics are welcome.
Understanding what Rollover means in Binary Options
In binary options, rollover describes both a feature or tool and a process or strategy. Rollover is one such tool that extends the flexibility of trading Binary Options. In order to understand what rollover is, what it does, and how it can be applied in Binary Options, let’s consider a common scenario in Binary Options which calls for the use of the rollover feature.
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A retail trader, Mr. Hoffman, takes a position on asset A, for a one-hour period. Say, 40 minutes into the trade, Mr. Hoffman’s position is a win and he is convinced the trend will continue after his position is meant to expire, what can Mr. Hoffman do if he wants to take more advantage of the trend by extending the period?
Mr. Hoffman can use the rollover feature or apply the rollover strategy. Using the rollover tool, Mr. Hoffman would be able to extend the period of the trade past when it is meant to expire. That is the basic function of the tool. The rollover strategy involves the thoughts and specifics that go into how a trader uses the rollover tool, like conditions that must be met before using the tool and the configuration of the tool (say how much time extension is appropriate and how much is overkill).
How does Rollover work in Binary Options?
When you use the rollover feature, the chain of events that occur is as follows:
- The returns from the asset in your existing trade, prior to your session’s expiry, are carried forward
- These returns are then reinvested in the same asset for a period that will continue after the expiry of your existing trade
Requirements that must be met before using rollover in Binary Options
- Time. Rollover can only be used when the position you want to use it on, is in session (that is before the session expires or when the session is yet to expire).
- Premium. Cost charged by a broker to use the feature. It is charged every time you use the feature, and may be a fixed rate or a percentage of the initial investment.
- Brokers may add other requirements. These extra requirements include but are not limited to, how far into the session (period from the start of the session) you can use the feature, how far from the session expiry you can use the feature (for example, the feature cannot be used within the last five minutes of a session), permissible extension periods. These requirements vary across brokers. To find out the exact requirements of your broker, consult the broker’s policy on rollovers.
When can you use Rollover in Binary Options?
- When you want to make more profit gains from an existing option and do not want to make a similar investment separately
- When you require more time for a trade to unfold, when it appears that an option will likely expire out of the money (that is, you would run a loss), especially when you are positive that the trend will reserve in the long run
Caution to exercise when using Rollover in Binary Options
Like many tools that increase flexibility in trading Binary Options, there is a risk to using the rollover feature. If the way things play out turns out to be the opposite of your outlook/prediction, you would be losing more money—your initial investment, the returns made in your original session (if you were profitable in your original session), and the surcharge (premium) paid to use the tool.