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  • Using Binaries for Short Term Directional Trading

    Binaries can be used to take an intra-day directional view on underlying markets, allowing the trader to go long or short in a market for a fraction of the margin necessary when trading more conventional contracts. And the usual benefits of Binaries apply – a trader’s risk is strictly capped without the danger of being stopped out by a temporary adverse move. This presentation shows you how to use Binaries, either singly or strategically combined, to tailor your exposure to an underlying market.

    Futures trading and options trading involve risk, which may result in financial loss, and are not suitable for everyone. Any trading decisions that you may make are solely your responsibility. The trading activity and other information presented herein are for informational purposes only. The contents hereof are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex.

  • As an example, let’s look at Nadex’s “US 500” Binaries, which settle based on an expiration value calculated by reference to the CME® E-mini® S&P 500® Futures†. In this hypothetical example, the CME E-mini S&P 500 Futures for March are trading at 1252.00. The recent price action of these futures, as seen in the graph below, leads you to believe that the market has just broken through some short term resistance at the 1250.00 level. You believe that over the next couple of hours a market rally of a further 5-10 points is significantly more likely than a drop back below 1250.

    †S&P 500 is a registered mark of the McGraw-Hill Companies, Inc. CME and E-mini are registered marks of the Chicago Mercantile Exchange Inc. Nadex is not affiliated with these organizations and neither they nor their affiliates sponsor or endorse Nadex or its products in any way.

    1250

    1252

    12pm 1pm 2pm

    Possible resistance level

    Current level

    Possible short term break out

  • Consider the ladder of end-of-day (expiration at 4:15pm ET) US 500 Binary contracts typically available on Nadex:

    Contract Bid Offer

    Daily US 500 (Mar) > 1268 - 2

    Daily US 500 (Mar) > 1265 - 2.1

    Daily US 500 (Mar) > 1262 - 2.8

    Daily US 500 (Mar) > 1259 3 6

    Daily US 500 (Mar) > 1256 15 18

    Daily US 500 (Mar) > 1253 38.3 42.3

    Daily US 500 (Mar) > 1250 66.9 70.4

    Daily US 500 (Mar) > 1247 87.3 90.3

    Daily US 500 (Mar) > 1244 96.2 98.9

    Daily US 500 (Mar) > 1241 97.6 -

    Daily US 500 (Mar) > 1238 98 -

    Daily US 500 (Mar) > 1235 98 -

    These prices can be viewed as consensus probabilities generated by Nadex market participants. So, for instance, the generality of Nadex traders perceive only a 15-18% chance of the US 500 settlement being higher than 1256 at the end of the day. And they believe that the probability of the market holding above 1250 at the end of the day is between 66.9% and 70.4%.

    2 hours to expiration, futures trading at 1252.0

  • If you believe in a 5 point rally by the end of the day, to approximately 1257, a strategy you could use is to buy the “>1256” contract at 18. For each contract purchased you would be risking $18 to potentially make a profit of $82. If you perceive the potential for a rally of around 10 points you could buy the “>1259” contract at 6. In this case, for each contract purchased, you would be risking $6 to potentially make $94. Or you might even buy the “>1262”, risking $2.80 to potentially make a profit of $97.20. Taking a less bullish view, if you believe the market will simply hold above the key 1250 level, you could buy the “>1250” contract at 70.4, risking $70.40 to potentially make a profit of $29.60.

    Contract Bid Offer

    Daily US 500 (Mar) > 1268 - 2

    Daily US 500 (Mar) > 1265 - 2.1

    Daily US 500 (Mar) > 1262 - 2.8

    Daily US 500 (Mar) > 1259 3 6

    Daily US 500 (Mar) > 1256 15 18

    Daily US 500 (Mar) > 1253 38.3 42.3

    Daily US 500 (Mar) > 1250 66.9 70.4

    Daily US 500 (Mar) > 1247 87.3 90.3

    Daily US 500 (Mar) > 1244 96.2 98.9

    Daily US 500 (Mar) > 1241 97.6 -

    Daily US 500 (Mar) > 1238 98 -

    Daily US 500 (Mar) > 1235 98 -

    The following slides show the kinds of P&L profile you can generate with these and other strategies.

    Back a strong (approx 10 pt) rally by buying one of these contracts – very small risk, very large potential reward for an outcome the market believes is very unlikely

    Back a moderate (approx 5 pt) rally by buying this contract – small risk, large potential reward for an outcome the market believes is pretty unlikely

    Back any kind of rally, and still profit even if there is a small fall, by buying this contract – large risk, small potential reward for an outcome the market believes is somewhat likely

    2 hours to expiration, futures trading at 1252.0

    Examples do not include fees and commissions, which may vary by broker. Examples assume all positions are entered into by trading at the available offer price rather than working orders at a more favorable level.

  • -200

    -100

    0

    100

    200

    300

    400

    500

    1247 1250 1253 1256 1259 1262 1265

    Current market (= 1252)

    Potential profit on 5 lot position (= $410)

    Potential loss on 5 lot position (= $90)

    Collateral required to enact this intraday binary strategy: $90

    Long 5 lots of “>1256” @ 18

    Contract Bid Offer Daily US 500 (Mar) > 1268 - 2 Daily US 500 (Mar) > 1265 - 2.1 Daily US 500 (Mar) > 1262 - 2.8 Daily US 500 (Mar) > 1259 3 6 Daily US 500 (Mar) > 1256 15 18 Daily US 500 (Mar) > 1253 38.3 42.3 Daily US 500 (Mar) > 1250 66.9 70.4 Daily US 500 (Mar) > 1247 87.3 90.3 Daily US 500 (Mar) > 1244 96.2 98.9 Daily US 500 (Mar) > 1241 97.6 - Daily US 500 (Mar) > 1238 98 - Daily US 500 (Mar) > 1235 98 -

    Buy 5

    In this strategy, going long the “>1256” contract, you would be backing the underlying market to be more than 4 points higher by the end of day. The consensus of other Nadex participants is that this is only 15-18% likely. Assuming you hold the position until expiration, each contract purchased would risk $18 to potentially make $82 (you buy at 18, and final settlement must be either 0 or 100). In this example 5 lots are being traded, so your maximum possible loss (and total required collateral) is 5 x 18 = $90. Note that you do not have to hold the position until expiration – you might choose to exit early if the market moves up a few points in the short term and you do not believe the rally will be sustained. The price at which you could exit under these circumstances will depend on the precise size of the rally and the amount of time still remaining until expiration, as these two factors will shape the new probability that the “>1256” outcome will occur.

    2 hours to expiration, futures trading at 1252.0

    Example does not include fees and commissions, which may vary by broker. Example assumes all positions are entered into by trading at the available offer price rather than working orders at a more favorable level.

  • -300

    -200

    -100

    0

    100

    200

    300

    400

    1247 1250 1253 1256 1259 1262 1265

    Current market (= 1252)

    Potential profit on 5 lot position (= $288.50)

    Potential loss on 5 lot position (= $211.50)

    Collateral required to enact this intraday binary strategy: $211.5

    Long 5 lots of “>1253” @ 42.3

    Contract Bid Offer Daily US 500 (Mar) > 1268 - 2 Daily US 500 (Mar) > 1265 - 2.1 Daily US 500 (Mar) > 1262 - 2.8 Daily US 500 (Mar) > 1259 3 6 Daily US 500 (Mar) > 1256 15 18 Daily US 500 (Mar) > 1253 38.3 42.3 Daily US 500 (Mar) > 1250 66.9 70.4 Daily US 500 (Mar) > 1247 87.3 90.3 Daily US 500 (Mar) > 1244 96.2 98.9 Daily US 500 (Mar) > 1241 97.6 - Daily US 500 (Mar) > 1238 98 - Daily US 500 (Mar) > 1235 98 -

    Buy 5

    This strategy, going long the “>1253” contract, backs the underlying market to be more than just 1 point higher by the end of day. This is a less bullish view than the previous strategy and the consensus of Nadex participants is that the outcome is more probable, at a likelihood of 38.3-42.3%. Because success is more likely, your risk/reward ratio is less favorable than in the previous example. Assuming you hold the position until expiration, each contract purchased would risk $42.30 to potentially make a profit of $57.70 (you buy at 42.3, and final settlement must be either 0 or 100). In this example 5 lots are being traded, so your maximum possible loss (and total required collateral) is 5 x 42.3 = $211.50. Once again, though, you are not tied in to risking the whole $211.50 by waiting until expiration. If you feel the position is not working out (or if it is going right and you want to take an early profit) you can place an order to exit early. Provided your order is placed at a level which is attractive to other participants, you can close out your exposure to cap a loss or lock in a profit.

    2 hours to expiration, futures trading at 1252.0

    Example does not include fees and commissions, which may vary by broker

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