With 35 minutes to go before the release of this months non-farm payrolls number, the bid/ask spread on the Nadex US 500 daily binary options on the (E-mini S&P) were $5.50 to $6.00 wide, at the money. It remained at that level up until where it went as high as $6.25. That’s over 5% of the total potential value at expiration. When the number was released, the bid/ask briefly went blank and the underlying quickly moved down $7.00, more than the price of the spread. What does that tell you in one simple glance?
Volatility is just a fancy way of saying prices are moving in wider ranges, faster than they were before. Implied volatility tells you what the market is expecting in from volatility in the near future. When implied volatility is up, markets are expected to move sharply and quickly on a relative basis. This happens before most economic releases and is especially large before the more historically important economic releases like the Non-farm payrolls release, GDP or in the case of crude oil, the weekly EIA figures. When you combine that with a longer period of time to expiration (theta), you get a larger spread.
While this may seem like an advantage to the market maker, it is really a trading lesson to you. You pay for the opportunity to profit. While most beginners are trying to figure out ways to put on the right directional trade prior to the big market moving data so they can enjoy Nadex limited risk while taking advantage of out-sized price swings, the fact that you PAY for this privilege is lost on them. Rather than trying to throw a fastball past the market by trading before the release, one may be better off trying to finesse a curveball after the volatility of the economic release has passed, and your cost to trade is slightly less. Find a high probability strategy and avoid the stress of trading on economic releases. Binary trading is just like any other trading, it’s a marathon, not a sprint. You work on your strategy and we’ll work on finding a non-sports analogy.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results