How Binary Option Traders Embrace Tight Ranges

How Binary Option Traders Embrace Tight Ranges
How Binary Option Traders Embrace Tight Ranges
How Binary Option Traders Embrace Tight Ranges Getty Images

Traders know that trending markets can be a more relaxing environment in which to trade than a range-bound market. In certain contexts, volatility can even add to a trader’s possibilities. However, we know that the markets are not usually volatile, and they are most certainly not always trending. Even on good trending days, there are times during the day when the markets slow down and grind along without any consistent direction.

Many traders learn to walk away from their trading desks for parts of the day when trading ranges and volatility decrease; this keeps them from the frustration of trying to find momentum in what could be described as a “dead market.” Wouldn’t it be nice if there were a way in which traders could capture profit even if the market were slow, whether for a time period of a week, a certain day, or even a particular hour?

Thankfully, there is a way for traders to capture profit in a slow market. This is why many traders have begun looking at binary options, which are offered and regulated on exchanges in the United States.

Over the past week in the equity indices, the volume has continued decreasing as ranges experienced their tightest days since the first half of this year. Many traders voiced frustration over the quiet markets, but some binary option traders saw this as being great opportunity.

All you need to find a trade with binary options is to have a market view, whether it is that the market will move higher, lower or even sideways.

There are many tools that traders use to capture profit on tight ranges. One method is looking at the average daily range; some use the ATR or Average True Range indicator in their calculations. Today is Tuesday, and the calendar is slow and there is no news apparent; overnight volume is low, and it can be expected to be a tight day. The last two Tuesdays have had a range of 13 and 13.50 points; and it could be reasonable to speculate that today’s range will also be within 15 points. The overnight open is 2093.25; 15 points higher would be 2108.25, while 15 points lower would be 2078.25.

This example of trading binaries would be to make a trade selling short one of the daily 2111.00 options for an amount of $12.50 and buying one of the daily 2072.00 options for $87.50. Both options are based on the daily 4:15 EST close of the S&P 500 December futures. This strategy will risk $87.50 while returning $25.00 at maximum profit, of greater than 25% on risk. What you need to earn maximum profit is for the futures to close between 2072.00 and 2111.00, which are both outside of the index’s range the last two Tuesdays.

The appeal of this trade is that there is a 39 point range in which the S&P 500 futures can close today and still allow this trade to be profitable. Currently, the underlying future is trading at 2093.00; this means that there is a cushion of 18 points to the upside and 21 points to the down side. So today at market’s close, this strategy has the potential to earn maximum profit whether the equity indices close higher or lower, as long as they close between the given range.

This is one example of many potential strategies with binaries, just based on a single market. There are binary option providers that offer these options for several instruments as well as offering expirations that include weekly down to expiring within the hour.

Note: Exchange fees not included in calculations.

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