At-The-Money (ATM) Binary Options offer a nice way to get a 1:1 risk e reward ratio, or a 100% return on capital risked. These trades occur when the marketplace of buyers and sellers are evenly split about the direction of a market. About fifty percent believe the price of an asset will go up, while the other fifty percent think the price of the asset will go down. Since every binary options contract is packaged in $100 increments, your goal with an ATM trade is to risk $50 to make $50.
When an ATM order is filled, the price of the asset you are trading is in line with a strike price that is offered on the price ladder. At that moment, there is usually equally divided opinion about where the price of an asset will settle at expiration
On Friday, December 11, the DOW fell 300 points and many of the other indices followed suit on falling oil prices and uncertainty about Fed rate hike worries.Here’s what the 15 minute charts looked like on Friday morning.
At 3:00am EDT, S&P 500 futures started selling off, and continued selling off through the Opening Bell. At 10:00, the market started to reverse. Given the strength of the downtrend, the reversal looked like a short-term pullback. The market was moving up toward the middle Keltner channel on the 15 minute charts and the 50 SMA on the 5 minute charts. The decision was made to place an ATM Working SELL Order at 2032.50 (12pm expiry) with a maximum risk of $50 per contract.
Working Orders are pending orders. You are dictating the price that you are willing to buy or sell a contract for. The market must move where you think it will move for the order to get filled. In this case, the market was moving upward from 2028 and it needed to get to the 2032.5 SELL target for the order to fill. Here’s how the trade played out:
As you can see in this 5-minute chart, the 50 SMA was acting as resistance. The 2032.5 strike price was right at the 50 SMA. As soon as the market went up to the 50 SMA, it triggered an ATM trade, and the SELL Working Order filled. The market then continued to dive in line with the downtrend. A trend line was drawn on the downtrend, and it was never threatened.
There were ample opportunities to take profit early in this trade, but the further the market moved away from the strike price, the safer the trade became. The decision was made to let the trade expire for the maximum reward of $50 per contract (exchange fees not included).