Settlement In My Favor Was All But A Certainty…

In Blog by Michael Arnold

BullseyeSettlement In My Favor Was All But A Certainty…

A trader of ours uttered this line as an explanation for not covering his short binary trade at his target. He was short the Wall Street 30 > 17,010 and his target was 16,970. Path Trading Partners analysis told him the Dow Jones was going to 16,970, so the strike was correct, the expiration was correct and everything lined up for a high probability trade. We have written and taught for years about the advantages of a targeted trade (increased discipline and process, greed control, increased probabilities), but the advantage is nullified if a trader doesn’t take action at the predicted target. This next example illustrates an advantage of Nadex Binary trading over other binary option choices, but also the dangers of getting too comfortable with the built in targets that Nadex binay options and traditional options offer the trader.

This trade took place Wednesday afternoon. As stated above, the trader did his analysis and predicted a short-term move lower with a target of 16,970 in the Dow Jones, so based off of this analysis, he went short the >17010 Wall Street 30 on binary option on Nadex. The market promptly went to 16952, giving the trader the opportunity to exit his short trade for a $97 payout (selling a binary option before settlement is a feature that Nadex allows, but other binary offerings do not). Given that the maximum payout would have been $100, this seems like a pretty good trade, but our trader decide that a settlement below his strike price of 17010 “was all but a certainty”. The market rallied from there and that particular binary option settled at 17,010.33, resulting in payout of $0. So did the trader do something wrong because he didn’t take a profit when there was one to take? No, the trader did something wrong when he did not take action at his target. Whether that action was to cover his trade and take whatever money was available, or choose a level on the Dow Jones Index that would have cause him to exit and prevent a total loss in the event the market rallied back up, an action needed to be taken. Traders can get lulled into a false sense of security by the built in targets that binary options offer, but being able to sell out of your options prior to expiration is a massive advantage and a characteristic that makes Nadex options a more professional product. In this particular example, the trader risked his $97 profit, to make $3 more, and that’s not even the main problem. The main problem is, he had a target and when the market got there he didn’t act. He had a plan, and he didn’t follow it.

In the movie, No Country for Old men, Tommy Lee Jones’ character tells a story about a man he knows attempting to slaughter a steer that gets injured in the process through a freak accident. He summarizes the moral of the story by saying, “Point bein’, even in the contest between man and steer the issue is not certain.” Targets are a call to action. Use them, and then act.

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