It’s no secret that much of the recent volatility has stemmed from the uncertainty out of China, as many of the economic indicators have been producing bearish results over the last few months, leaving particular emphasis on tonight’s gross domestic product.
It’s likely that the Chinese SGX® FTSE® Xinhua® China A50 Index Futures will experience some volatility after the release, and that they will possibly slingshot back and forth before developing a trend. This kind of activity can be challenging to trade, given the wide ranges; but we will look at a risk-controlled strategy with binary options that can profit whether the index closes the session higher or lower.
This strategy is essentially a straddle. The trade used as an example shows buying the 9360 at the offer of $38.75 and selling the 9140 at a bid of $64.00. This trade would be profitable if price for the China 50 Index Futures closes either above 9360 or below 9140. In this trade, the risk is 74.75 if price closes between the strikes; and the maximum reward would be $25.25 if price closes outside either of these strikes, which would be a return of 33% on risk for this trade.
Alternatively, let’s say you believe the index will trade range-bound or will fade the early move and trade back to close near the open. Then you could do the reverse of this trade, believing the China index futures will close anywhere in between the 9140 and 9360 strikes. In that case, you could buy the 9140 option at its offer of $71.50, and sell the 9360 option at its 31.00 bid. The potential profit if the day closes between the strikes would be 59.50, while the maximum risk would be $41.50, or better than a 1:1 return on risk.
With either strategy, the trader has limited risk while maintaining the ability to profit with multiple scenarios and price reactions. This is just one benefit of binary trading, as CFTC-regulated exchanges in the U.S. offer expirations on several instruments and types, ranging from 5-minute to weekly expirations.
Note: Exchange fees are not included in calculations.