The problem with trading for a bounce in a falling market is that it can always continue lower, and sometimes it can continue with accelerated momentum. Any time you are trading against the momentum of the market it’s important to have defined risk. Binary Options are one vehicle that provides defined risk for traders.
Looking at the available weekly binary options on the US Tech 100 Index as of the end of trading on Monday, you can see the variety of strike points that you can choose from depending on your risk vs. reward preference.
By adding some Fibonacci expansion numbers on the chart, if you were looking for a possible 61.8% pull back of the most recent move then that would bring you to approximately 4,678.23. With that in mind, you could purchase the > 4,674 weekly binary option, risking $45 for a max reward of $55 if the underlying index closes over 4,674 on Friday.
Because the weekly binary option at 4,674 is slightly above where the current index is trading you would be getting a 1 to 1.22 risk vs. reward for this trade. It’s important to realize that the reason you would be getting a favorable risk vs. reward is because if the option expired today it would be worthless at the current price of the US Tech 100. However, you could be right in this trade only 5 out of 11 times and still come out profitable (not taking into account commissions and expenses).
With 4 days left of trading in the week you could lock in limited downside of only $45 per contract, while securing a maximum profit of $55 if the US Tech 100 closed above 4,674 on Friday. You also have the ability to trade this position during the week should you decide to take profits or cut your losses at any point.
There are many other trading opportunities with limited risk available in just this one index on the chart featured. Depending on your market expectations and trading methodology, binary options can offer more possibilities when it comes to finding the best trade for each situation.
Note exchange fees not included in calculations