Unlike other financial instruments, when trading binary options volatility is the best thing that can happen to you, especially when trading very short time periods. It’s well known that the market experiences higher volatility in times of distress and global instability. In other words, when we have risk aversion and the stock market is selling off, we’re dealing with higher volatility thus the entire market is selling off.
What is a Soft Market?
A soft market is a market that has more potential sellers than buyers. The impact of a soft market means that the underlying asset will go down. In such an environment the best strategy is to only buy Put Options where the expectation is that the underlying assets will continue to go down. Usually, the sell-off in a soft market environment can lead to fast drops in the price of the underlying asset. During a soft market, there is a potential for some pretty dramatic changes in the market.
The oversupply of capital is really the simplest reason or the main reason for the market to drop in a soft market environment. Each soft market is unique, but they all have the common characteristic that it’s a balance between the amount of capital available and the amount of risk that’s out there.
When dealing with a soft market, speed is very important where you want to trade binary options through a broker that’s responsive and able to quickly quote you with reliable quotes. This is a key component when trading binary options. One of the biggest disadvantages of a soft market is that it’s not the right market for buying Calls.
Buy Puts in a Soft Market
Right now the stock market as a whole is doing great, however, within the stock market, there are sectors which aren’t performing as well, and one particular example is the banking sector. By way of example, Deutsche Bank stock (at the time of writing – October 2016) is in a soft market.
The Deutsche Bank stock has fallen more than 65% since the peak in 2015 July and if you would have focused your efforts on just buying Put Options you would have profited handsomely. If the underlying asset is in a soft market than Binary Options can be one of the best instruments for a retail trader to take advantage of this environment.