Playing The Bounce With Binary Options

Playing The Bounce With Binary Options

Stocks got hit hard on Monday with indices down 1% across the board. Any time the market makes big pull backs you can consider the possible risk vs. reward possibilities of playing the market for a bounce.

Playing The Bounce With Binary Options
Playing The Bounce With Binary Options Getty Images

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.

Playing The Bounce With Binary Options

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

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility. Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.