THE BINARY VICTORY LAP

In Blog by Michael Arnold

On Friday, we posted an article titled “Days Like Today are Made for Binary Options”.The gist of the piece was how binary options give great risk/reward opportunities for big news days. Fed Chair Janet Yellen had spoken the night before and the US equity markets were poised to open much higher the following morning. Referring to Chair Yellen’s speech, the article stated “As the trading day progresses, and market participants realize that this clarifies nothing (“they just threw kerosene on that fire” RBC Capital Market’s Jonathan Golub said Friday morning), there could be major reversals in the markets mentioned above.” That is exactly what happened, the S&P 500 opened up, made new daily highs around noon CDT, then fell the rest of the day into the close. But the victory lap is not for the trade call, but for binary options themselves.  The day played as a perfect example of why these regulated option contracts can be such an advantage for the traders of any skill level.

Below is a screenshot of the Nadex US 500 contract at 9:27am CDT.

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Note the indicative index is at 1932.75. The at-the-money (ATM) strike would be 1932 and the bid on that strike is 48.75 (risk 51.25 to make 48.75). If you thought there could be a late day selloff as our note predicted, you could sell lower down the chain in order to have your fixed risk, be lower than your reward. The 1923 strike has a 71.50 bid and the 1917 strike has an 82.50 bid. You could also wait, in the hopes of getting a mid-morning rally at which time you could sell the earlier ATM strike.

As the next image shows, at approximately 12:00 pm CDT, the indicative index was almost 4 points higher, allowing a trader to now enter a short position in the 1932 strike with a positive reward to risk ratio (risk $37.50 to make $62.50).

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For traders that sold the lower strikes, there are paper losses incurred, but the total risk was clear at the time of entry, so no Rolaids© needed. In traditional futures, a 4 point move in the ES would stop many traders out of their short trades, but the nature of binary options allows the trader of Nadex trader to relax and wait for the move back down or even add to the trade, within normal risk parameters (again knowing the maximum dollar amount at risk).

By approximately 2:13pm CDT, all trades are well in the money, as shown below.

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The sheer volatility of news days (and especially Friday news days) scares many good traders out of the market. If you often find yourself making the right call on those days, but getting  stopped out when attempting trades, then ease your stress by trading only binary options on news days.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results