Out of the money options are great ways to reduce your risks and increase the rewards when you are able to identify an area where price can easily move — also known as sweet spots. Markets typically move in waves. These waves are created by support and resistance areas. In other words, price moves up, finds and area of resistance, retraces to find support and then moves up again (or vice versa in a downtrend). A sweet spot is created when there are no previous areas of resistance or support.
For example, Sunday night on the Dow Jones, a sweet spot was forming. If price was able to find support at the tan and green lines on the chart below then there was nothing standing in the way for price to move up to the 16600 area. The Dow Jones price was around 16350 with no resistance area until around the 16600 area. That’s a potential move of about 250 points. On the futures side, that would be either a single trade or a trade where you add-on to your original position. However, with binary options, you can take one single sweet spot trade and make multiple trades using the same setup.
Using Out of the Money Binary Options, simply going out one to two strike prices, you had trades every two hours beginning at 8am, New York time plus a Daily 4:15pm New York time and an 8am – 4:00pm New York time. That’s a total of 9 trades from one sweet spot setup (remember there is nothing in the way of price moving up, which makes it SWEET). Plus, you also have the binary spreads that you can enter, as well.
For example, on Monday morning there was a Spread available from 16400 to 16800 with an expiration at 4:15pm. Buying the spread at this area would allow you to capture the bulk of the move to the upside because there was no resistance area to stop price from reaching the 16600 area. Since price was trading around the 16400 area, your risk was limited (entry price minus the floor at 16400) and the only limit to profit was the ceiling area at 16800. A really great risk to reward trade that could be taken in conjunction with the daily and two hour binary positions.
In essence, one sweet spot trade opportunity gives multiple trades, with limited risk, using a combination of the out of the money options with the binary spread opportunities.