What Are Pair Options

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Pair Options for Profit

April 9, 2020 1:54 pm

There are several different binary options instruments to choose from, with Pair options being among the newest additions to trading platforms. This form of trading is similar to trading Forex in that each trade will involve a pair of assets, with the goal being to determine which of the two will outperform the other. The primary difference is that instead of currency pairs only, the trades are likely to involve assets from other classes, such as Apple versus Google.

Since no two assets are likely to have prices that are similar enough for a direct comparison, relative performance will be used to determine which asset outperformed the other for the duration of the contract. The same as all binary trades, Pairs contracts are bound to an expiry time, at the end of which the outcome (profit or loss) will be determined. Using the two assets mentioned above, had you predicted that Apple would outperform Google during the selected time-period and they did, the offered payout would be yours.

There are a number of advantages to trading Pairs. One would be the fact that it can at times be quite easy to determine which of two assets is going to perform better than the other. There will be times when price movement for one or the other is quite clear, and market sentiment is easy to analyze. Another would be that you simply have to select one or the other, and need not be concerned over short-term spikes and falls, as the bigger picture is what is most important with this type of binary options trade.

The primary disadvantage is the fact that the upcoming price performance of two options, rather than one, must be taken into consideration. It will be necessary to analyze the past and current price movement of both assets if you are to accurately predict which of the two will perform better. Fundamental analysis will also have to be completed for both, as market sentiment (or lack thereof) will always play a role in price movement. Analyzing two underlying assets will involve a slightly larger time commitment, so keep this in mind.

“Floating Pairs” may also be offered by your broker. When offered, this type of instrument works very differently from the standard trade. Rather than being bound to an expiry time, a floating contract can be closed at virtually any time after it has been opened. The payout received (if any) will be directly related to the asset prices at the time the position was closed, along with the return percentage being offered by the broker. This instrument is similar to Forex trading in many ways, but do not confuse the two since the payout structure does vary.

Pair options offer a nice alternative to standard and FX trading. This instrument can indeed provide excellent profit opportunities throughout the day, even when markets are volatile. New traders who struggle with forecasting price movement for single assets may do well to test out this instrument. Although additional analysis is required, all that this binary options trade asks of the trader is to decide which of two assets is going to be the better performer during a set period of time.

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7 Binary Options

A lot of times when doing technical analysis traders try and eliminate market forces and market sympathy from being factored into their decision of what and where to trade. When you eliminate this part of the analysis of the equation, you are said to be trading a market neutral strategy. One great strategy that attempts to do this is called Pair Options Trading.

Pair Options Trading is based on the theory that certain assets have shown over time to have their price move very close to the same length over the same time frame as another asset; this is called correlation of the pairs.

The relative amount of correlation between two pairs when it comes to trading is addressed as a percentage. Of course the ideal correlation between the movements of two assets is 100%, but unfortunately you will never see this. 100% correlation means as one asset moves over time up or down in price, so its pair moves ‘exactly’ the same. Of course at the opposite end of the spectrum there can be zero correlation between asset pairs if they move in opposite directions all the time.

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Why is correlation a useful parameter on which to base a trade on? The answer is because it has a predictive nature to it when analyzing and monitoring favorable factors for placing a trade. Two assets that often correlate together send a strong signal to place a trade when one starts to deviate from the other.

This market neutral strategy, pair options, seeks to fully capture all the benefits that close correlation has to offer. When investors see a break in the movement of two highly correlated assets, they can place both a put option on one asset and a call option on the other asset at the same time.

Chances are that atleast one of the trades will be profitable for them if they do this. One nice thing about pair options is they can be profitable regardless which direction the market is trending in. Many trading sites allow you to select assets that can be tracked according to the correlation between them. Analysis of this can directly lead to finding profitable trading opportunities.

In case you were wondering, the entire concept of pair option trading is not a new concept by any means. It has been used by traders as a market neutral strategy for many years because it has proven to be reliable and effective. Many closely related strategies have been formed from using the basic premise of pair options strategy too. A trading website called Banc de Binary, was the first to introduce it for use in online trading in 2009; this made this type of correlative information available to everyone, not just big professional investment firms.

So now that this information is available and ready to use, take some time to examine it. If you read more on the subject of pair options trading, you will see that the correlation between many pairs has already been figured out for you. That should make it easy for you to spot the uncorrelated movement between the pairs and place your profitable put and call options exactly where they need to be.

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What are minimal pairs?

A minimal pair or close pair consists of two words with sounds that are very similar but have different meanings.

For example, rot and lot may sound similar, especially to some non-native English speakers.

Below are ten other examples of minimal pairs, in the each sentence choose the correct word. Try saying the words out aloud, do you notice how similar they sound?

    1) Heat up the water in a ___.

2) You can throw all the rubbish into the ___.

3) We ___ a great weekend.

4) You can ___ the envelop and post it.

5) The ___ was just wide enough for the dog to squeeze through.

6) He polishes the ___ buttons on his uniform.

7) Take a ___ of this soup and tell me if you like it.

8) She caught a butterfly in a ___.

9) See a doctor about the pain in your ___.

10) He help the young girl ___ her shoelaces.

Paired Comparison Analysis

Working Out Relative Importances

When you’re choosing between many different options, how do you decide on the best way forward?

This is especially challenging if your choices are quite different from one another, if decision criteria are subjective, or if you don’t have objective data to use for your decision.

Paired Comparison Analysis helps you to work out the relative importance of a number of different options – the classical case of “comparing apples with oranges.”

In this article and video, we’ll explore how you can use Paired Comparison Analysis to make decisions.

Click here to view a transcript of this video.

About the Tool

Paired Comparison Analysis (also known as Pairwise Comparison) helps you work out the importance of a number of options relative to one another.

This makes it easy to choose the most important problem to solve, or to pick the solution that will be most effective. It also helps you set priorities where there are conflicting demands on your resources.

The tool is particularly useful when you don’t have objective data to use to make your decision. It’s also an ideal tool to use to compare different, subjective options, for example, where you need to decide the relative importance of qualifications, skills, experience, and teamworking ability when hiring people for a new role.

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Decisions like these are often much harder to make than, for example, comparing three similar IT systems, where Decision Matrix Analysis or some form of financial analysis can help you decide.

How to Use the Tool

To use the technique, download our free worksheet, and then follow these six steps:

  1. Make a list of all of the options that you want to compare. Assign each option a letter (A, B, C, D, and so on) and note this down.
  2. Mark your options as both the row and column headings on the worksheet. This is so that you can compare options with one-another.

On the table, the cells where you will compare an option with itself are blocked out. The cells on the table where you would be duplicating a comparison are also blocked out. This ensures that you make each comparison only once.

  1. Within each of the blank cells, compare the option in the row with the option in the column. Decide which of the two options is most important, and write down the letter of the most important option in the cell.
  2. Score the difference in importance between the options, running from zero (no difference/same importance) to, say, three (major difference/one much more important than the other.)
  3. Finally, consolidate the results by adding up the values for each of the options. You may want to convert these values into a percentage of the total score.
  4. Use your common sense, and manually adjust the results if necessary.

Example

For example, a philanthropist is choosing between several different nonprofit organizations that are asking for funding. To maximize impact, she only wants to contribute to a few of these, and she has the following options:

  • An overseas development project.
  • A local educational project.
  • A bequest for her university.
  • Disaster relief.

First, she draws up the Paired Comparison Analysis table in figure 1.

Figure 1 – Example Paired Comparison Analysis Table (not filled in):

A: Overseas Development B: Local Educational C: University D: Disaster Relief
A: Overseas Development
B: Local Educational
C: University
D: Disaster
Relief

Then she compares options, writes down the letter of the most important option, and scores their difference in importance to her. Figure 2 illustrates this step of the process.

Figure 2 – Example Paired Comparison Analysis Table (filled in):

A: Overseas Development B: Local Educational C: University D: Disaster Relief
A: Overseas Development A, 2 C, 1 A, 1
B: Local Educational C, 1 B, 1
C: University C, 2
D: Disaster
Relief

Finally, she adds up the A, B, C, and D values and converts each into a percentage of the total. These calculations yield the following totals:

  • A = 3 (37.5 percent).
  • B = 1 (12.5 percent).
  • C = 4 (50 percent).
  • D = 0.

Here, she decides to make a bequest to her university (C) and to allocate some funding to overseas development (A).

Key Points

Paired Comparison Analysis is useful for weighing up the relative importance of different options. It’s particularly helpful where priorities aren’t clear, where the options are completely different, where evaluation criteria are subjective, or where they’re competing in importance.

The tool provides a framework for comparing each option against all others, and helps to show the difference in importance between factors.

This site teaches you the skills you need for a happy and successful career; and this is just one of many tools and resources that you’ll find here at Mind Tools. Subscribe to our free newsletter, or join the Mind Tools Club and really supercharge your career!

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