Timing The Oil Market With Binary Options
Volatility is back in the oil market with WTI Crude breaking below the 44 level today amid oversupply concerns.
By Evan McDaniel
Tuesday, July 26, 2016
Speculating in the oil market can be rife with risk, as well as time-consuming due to the nature of the market. Using Nadex binary options can help a trader minimize the risk of getting stopped out while allowing the time he or she needs to let the trade play out. You can do this without worrying about margin issues due to the fact that all trades on Nadex are fully collateralized.
Looking at the Crude Oil (Sep) binary ladder below you can see the Out Of The Money pricing, and In The Money Pricing where the ITM pricing is higher vs the OTM. That being said, given the recent oil price action I am in the camp oil will fall into the $42-41 level before buyers come back into the market.
In translating the above idea into a trade, you can trade both the short and long side. You could sell an OTM binary (such as the $44.25 strike for $27) to capture the spread between what you sold the binary for and zero. You could also wait for the crude oil price to fall to $43 before going long the $43.25 binary strike. Waiting for oil’s price to drop below its current level allows for a lower-cost entry compared to the previous day’s prices.
For the sake of this example, let's say you decide you want to buy the $43.25 strike, but only if you can get it for less than $50 a contract. That means you will wait for the price of crude to dip below $43 overnight. Currently, as you can see in the ticket below, the price of the binary is $52.75 on the offer. If you held it to expiration and the trade was profitable, you would get a return of $47.25 a contract upon settlement at full value.
If you were looking to execute the trade at say, $40, you would place a limit order to buy the binary option with a strike price of 43.25 for $40. That limit order would fill if and when the price of the binary dropped to a $40 bid.
Unlike a market order, a limit order is not guaranteed to fill as the market may not ever come to your price. If and when the order is filled and you execute the oil trade, you will need to have a target. For example, a $70 target would be a 75% return on the initial investment of $40.
Note Exchange trading fees not included in calculations
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