In the option market there are a variety of trading opportunities to choose from, and the same is true when it comes to the binary option market. Binary options have contracts that expire weekly, daily, hourly, and even as narrow as 5 minute contracts. When scanning the market for trading opportunities, it’s important to understand the time aspect of your trades. If you’re looking for longer term moves, then maybe your most profitable trade could be buying or selling a weekly binary option. If you’re looking to capitalize off of short quick moves in the market then shorter term binary options may be just what you’re looking for.
Around the market open and close there may be opportunities for volatility. Daily binary options on the indices expire at 4:15 p.m. ET on most normal market days. Here we see a chart of the Nasdaq 100 Futures as of 3:40 p.m. ET last Wednesday with the available daily binary option contract pricing along the right axis. The red vertical line represent the 4:15 p.m. expiration time, which is exactly 35 minutes away.
For the purposes of this article, let’s say that you see no real action coming into 4:15 p.m., and are confident that the indices will at least close above their lows for the day. If you were looking for a high probability trade to capitalize off of flat trading coming into the close, with a bullish direction, then you could buy a binary option below where the current market is trading. Looking at the chart of the Nasdaq, one binary option you could choose to buy is the > 4,600 at $83.25.
The market was trading 10.5 points above this level, and as long as the Nasdaq closed above 4,600 then you would profit $16.75 per contract (excluding exchange fees). Your max risk for this trade was the $83.25 you put up initially, so you would be risking $5.12 for every potential $1 in profit. You would need to be right in this trade more than 80% of the time to be profitable assuming you held it to expiration.
If you were slightly bearish but expected very little market movement coming into the close then you could sell a binary option above the current market for a similar trade on the opposite side of the market. Depending on what kind of market action you’re looking for, and what type of risk vs. reward trade you’re comfortable with, binary options can provide another possibility when scanning the market for the best trading opportunity.