Playing it safe on a risky day…
Yesterday, world financial markets were sent into turmoil. Many markets in the United States suffered their greatest intra-day point decline on record, with the DJIA futures plummeting as far as 1,150 points. The S&P 500 futures, after already declining during the overnight session, suffered a 37-handle drop during the first five minutes of the regular 9:30 session. This brought the S&P 500 to an overall drop of 140 handles at its lowest point, only to rally 73 handles in the following ten minutes.
With risky conditions in the markets, it is more important than ever for a trader to understand and limit risk. Yesterday, many traders noticed a lack of liquidity in the markets and experienced slippage of six handles on trades early in the session. During the first hour, the S&P 500 futures experienced an average true range of eight handles per minute. The significance of this cannot be overstated, as traders were entering positions and being stopped out in seconds.
However, even during Monday’s crash, some traders were able to remain calm, to understand and control their risk, and to place trades doubling their money – using binary options.
Looking at the chart, the selling of the US 500 became extended in the overnight session. As the cash markets opened, it seemed that upside buy stops were to be run. At 10:15 EST the index would test a key area that had been a floor during the Asian session overnight but had failed. I believed that the index could continue to climb higher and potentially go green on the day; however, I was not willing to be exposed to much risk.
With this in mind, I bought a binary option – a US 500 1952 daily expiration, at a cost of $18 per contract. The risk was the amount of the premium ($18). The maximum potential gain would have been realized if the index closed the day above 1952.00 – a potential profit as high as $82 on each $18 contract. (This $82 potential profit – per contract – is the difference between the $100 payout and the premium paid.) With this binary option trade, there was no margin risk. The potential loss was no more than the $18 paid per contract, making the potential reward-to-risk on this trade better than 4:1.
There was enough safety in this risk-to-reward scenario that, after having this order filled, I felt comfortable enough to walk away from the trading desk and relax, returning two and a half hours later to see if the index had continued to rise as expected. It had; however, at that time, I re-examined the trade because the index had risen so far, so fast, that it was now showing weakness as it approached and failed the trend-line shown on the chart.
Even though it did not go as high as it could have, using binary options, I still doubled my money in just a couple hours – and that without having to stress over the market on a day like Monday.
This is one example of many opportunities in binary options; and how, even on an extremely troubled day in the markets, traders can still control their risk and make money in binaries.